Demand for jet fuel may take years to recover from the Covid-19 pandemic and will lag behind an uptick in oil prices as air travel demand remains weak, especially in the absence of a vaccine, according to Bank of America (BofA).
A measured rebound is expected in the third quarter of 2021 before a full recovery in demand for the aviation fuel by 2023, the BofA Global Research said in a July 23 commodities report. The Organisation for Economic Co-operation and Development (OECD) countries and China will drive most of that uptick.
The recovery in jet fuel demand will be L-shaped as quarantine requirements and fresh outbreaks of Covid-19 in some cities curb air travel. An L-shaped recovery is a sluggish rebound that follows a deep recession with persistent unemployment and stagnant economic growth.
In terms of supply, while refiners have sharply reduced their jet output, stocks of middle distillates and jet remain “very high” in most locations, BofA said.
“The only way out of this for jet seems a cure or a vaccine for Covid19,” bank analysts said. “Yet creating 6 billion vaccines for 7.8bn people in the world could take several years. And even if most of the jet fuel demand recovery will come from OECD and China going forward, it could still take 12 to 18 months to vaccinate 2bn people.”
Air traffic around the world collapsed following the Covid-19 outbreak as countries shut down their borders and airlines grounded their aircraft, leading to a crash in jet fuel demand.
Some freight and domestic passenger travel have started to pick up. Recent trends suggest air traffic between or within developed and emerging economies, will likely remain restricted until the end of the year.
“The recovery in air travel is at best frail, as the US continues to post record Covid-19 transmission rates and Spain has led the pick-up in new Covid-19 infections in Europe in the past two weeks,” BofA said.
The US jet fuel demand recovery path remains L-shaped, although there has been a pick-up in July that may or may not last given the recent US virus contagion rates, it said.
Meanwhile, jet exports out of the US Gulf Coast to Latin America, Canada and Europe have collapsed, as flights were grounded due to the fast spread of the coronavirus in in Brazil, Mexico and other countries in the Americas.
Globally, petroleum products have recovered a lot faster than jet fuel, the report showed.
As such, while crude runs across the US and other regions have picked up, jet production remains depressed relative to other products and historical norms, BofA said.
For example, US crude runs dropped from 17m barrels per day in January, but they picked up from 12.3m b/d at the lows in May to 14.2m runs in July.
Over the same period, jet production collapsed from the highs of 1.9m b/d to 0.5 and is now back at 0.8m b/d.
With refining margins, also known as jet cracks, for jet fuel at the most depressed levels ever, refiners have sharply adjusted down their jet output.
“We believe jet fuel specifically and middle distillates more broadly will lag the recovery in oil prices,” the report said.
The world’s demand for oil is expected to recover to 97.4 million bpd next year. However, this will still be 2.6 million bpd below 2019 levels, with declines in jet fuel and kerosene demand accounting for three quarters of the deficit, according to the International Energy Agency.