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Back in June, the global oil market appeared poised for a resurgence, buoyed by a promising uptick in jet fuel demand. The International Air Transport Association (IATA) projected that passenger numbers would hit a record high this year, sparking hopes of a robust recovery for the beleaguered aviation sector. At the time, Oilprice.com highlighted the potential for increased jet fuel demand to bolster oil prices, painting a rosy picture for stakeholders in the oil and gas industry. Additionally, a June 21st analysis from JPMorgan confirmed that global jet fuel demand had surpassed pre-pandemic levels, signaling a return to form for one of the most critical segments of oil consumption.
However, the optimism of mid-2024 has been tempered by recent developments. Airline operators and travel companies are expressing growing concerns about the impact of shrinking disposable incomes on consumer spending and air travel. This, coupled with a slump in global trade, has led to a reassessment of the sector’s prospects.
Jet fuel, the fourth-most-used petroleum product in the United States, averaged about 1.56 million barrels per day (b/d) in 2022, accounting for roughly 8% of total petroleum consumption, according to the U.S. Energy Information Administration (EIA). This underscores the importance of the aviation sector’s health to the overall oil market. The current stagnation in jet fuel demand raises red flags about a potential broader oil demand disappointment.
Globally, jet fuel demand averaged 7.49 million barrels per day so far this year through July, according to Goldman Sachs data cited by Reuters. That’s a 500,000 bpd bump from this same period last year. For the remainder of the year, Goldman expects that to fall to a 400,000 bpd increase year over year. But that figure means that 2024 will shape up to be a disappointment compared to Goldman’s full-year predictions for a 600,000 bpd average—a figure that will be impossible to hit unless jet fuel demand increases in the second half of the year.
One factor contributing to the subdued outlook for jet fuel is the improvement in aircraft fuel efficiency. The International Energy Agency (IEA) noted in April that the demand for jet fuel and kerosene was lagging behind the global miles flown. This discrepancy is largely due to advancements in fuel efficiency technologies that allow airlines to operate with less fuel per mile. So, despite air traffic exceeding pre-pandemic levels, the growth in jet fuel demand has not kept pace.
The ramifications of this efficiency-driven decoupling are twofold. On one hand, it’s a positive development for airlines looking to cut operational costs and reduce their carbon footprint. On the other hand, it presents a challenge for oil producers and refiners who are now facing a potentially permanent reduction in one of their key markets. The IEA, which has been criticized for what has been categorized as its overly bearish oil demand outlook and perhaps overly optimistic view of the speed of the energy transition, has suggested that this jet fuel trend could persist, potentially capping the growth of jet fuel demand even as air travel continues to recover.
But this efficiency is just one piece of the puzzle. The current economic climate is exerting additional pressure on the aviation sector. With inflationary pressures eroding consumer spending power, discretionary expenses like air travel are taking a hit. This is particularly concerning for long-haul and international travel, which are more sensitive to economic downturns. At 0.3% in the March-May period, average U.S. consumer spending growth is the slowest increase in over a year.
The result? Airlines are scaling back their growth projections and tempering their capacity expansion plans, and oil demand will surely be affected.
Jet fuel is a major driver of global oil demand, and any sustained weakness in this sector could have ripple effects throughout the industry. Refiners may be forced to adjust their production strategies to compensate for the reduced demand for jet fuel, and just the fear alone of a possible reduction in global oil demand could have a profound effect on global crude oil pricing and futures.
The jet fuel demand situation is exacerbated by the broader challenges facing the global economy. Geopolitical tensions, supply chain disruptions, and shifting trade patterns are all contributing to a sense of uncertainty that is already weighing on the oil market. The recent decline in jet fuel consumption is just one piece of a larger puzzle that industry players are grappling with as they navigate this complex landscape.
The recent slowdown in global jet fuel consumption is a stark reminder of the challenges that the oil and gas industry continues to face in a post-pandemic world. The initial recovery in jet fuel demand may have come as a welcome relief to the oil industry, but the recent decline is giving the market cause for concern.
