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Global Oil Demand Growth
- While global oil demand growth, physical disruption in Libyan crude production, and unrest in North Africa and the Middle East have caused crude oil and petroleum product prices to rise in recent months, few product markets have shown as much strength as jet fuel.
Not only are jet fuel prices in the United States and elsewhere back at highs unseen since mid-2008, but jet fuel prices generally have risen faster than those of both crude oil and many other refined products in recent months. Jet fuel crack spreads – the notional price difference between a barrel of jet fuel and one of crude oil – have surged to over two-year highs in the case of Brent crude oil, or three-year highs in the case of the New York Harbor jet fuel- New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) crack.
Why have prices risen so high?
h2> Global jet fuel demand has been showing signs of renewed strength. This is particularly true of emerging and newly industrialized economies such as China, where air travel demand is growing rapidly. The General Administration of Civil Aviation of China recently reported a 16.8 percent annual increase in air traffic in January. Not surprisingly, Chinese jet fuel demand is surging. In expectation of further growth, the country is heavily investing in its aviation sector.
Recent events in the Middle East and Japan may take a temporary toll on demand. The International Air Transport Association (IATA) recently reported a six- percent increase in international scheduled passenger traffic for February 2011 and a 2.3 percent gain in air freight year-on-year. However impressive those numbers might look, they mark a step back from even faster growth of 8.4 percent and 8.7 percent, respectively, reported for January. IATA attributes the slowdown to unrest in North Africa and the Middle East, and warns that the tragic earthquake and tsunami in Japan might further dent growth figures for March.
Unrest and confrontation in Libya have withheld from the market, significant volumes of light, sweet crude oil, which lends itself to the production of light products such as middle distillates and jet fuel. Concerns also arise about the possible risk of oil disruptions elsewhere in the region, as a result of political unrest, and are particularly unnerving for jet fuel markets, given Europe’s significant dependence on jet fuel imports from the Middle East.
Meanwhile, the tragic Japanese earthquake and tsunami, while they might have moderated further crude price gains in the short term, had an opposite effect on jet fuel markets. By forcing several refineries to shut down, they reduced crude oil demand but curtailed production of refined products, notably jet fuel. Since around 2006, Japan had swung from a small jet fuel net importer to a net exporter, mostly to China and Hong Kong, and less frequently to the United States. Japan now looks set to resume its status as a net importer, at least for some time.
It remains to be seen how rising jet fuel prices, if they continue, would affect the airline industry and the nascent recovery in air travel demand. Ultimately, the market could adjust to rising jet fuel prices by curtailing demand, which could cause prices to fall back. In the short term, however, jet fuel prices appear likely to remain high.
Credit: Eurasia Review newsletter
