Global jet fuel markets are under strain following the onset of the coronavirus pandemic (COVID-19). As global airlines cease flying amidst falling passenger demand, the futures markets are pricing in a longer-term decline that may take months to recover.
At the end of May 2020, the International Air Transport Association (IATA) predicted that debt from the global airline industry may rise to $550 billion1, an increase of $120 billion from the debt levels expected at the beginning of 2020. Rising debt levels are, in part, due to the severe travel restrictions imposed by governments in efforts to curtail the spread of the coronavirus. Global passenger traffic as of June 8, 2020 showed demand dropped 64.8% in comparison to the prior year, the largest in recent history.
According to the Official Aviation Guide (OAG), which tracks data from roughly 15 countries, as of the end of June 2020, around eight countries were still showing a lower reduction in flights versus the same period 12-months earlier, indicating that the ongoing aviation crisis is still prevalent.
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Airlines have cut flight capacity on an unprecedented scale to deal with declining passenger numbers on the back of a surge in the number of coronavirus cases globally. Global scheduled capacity as of May 2020 remains well below 2019 figures showing signs of a slight increase with Asia leading as the hardest impacted. It is expected that the spread will be felt throughout Europe and the US as the fallout from the virus continues to take hold. Across most of Europe, the number of flights remained around 90% below year ago levels in early June 2020. US flight capacity was approximately 70% below year ago levels over the same period.
The chart below illustrates the impact on commercial flights. According to data from Flight Radar 24, the 7-day moving average of flights has fallen to approximately 35,000 per day. By contrast, the number of commercial flights per day in May 2019 was 115,000.
Deteriorating demand has led refiners to cut supplies due to falling jet fuel profit margins. According to the latest data published by the Energy Information Administration (EIA), U.S. refinery utilization has fallen below the 5-year average to 75.5% in the week that ended on June 26, 2020 compared to 94.2% year-over-year. These figures correspond to levels last seen in 2008. Futures markets are indicating that the decline in airline travel may be longer lasting with prices remaining at lower levels for much of 2020. Based on exchange data from CME Group, the forward curve for jet fuel prices from Europe, Singapore, and the United States shows a continued decline in prices in the months ahead.
Futures for December 2020 and 2021 have fallen sharply compared to year ago levels. The futures settlement price for European jet fuel for December 2020 delivery has lost around half of its value to trade at $370 per metric ton at the end of June 2020 compared with over $650 per metric ton 12 months earlier. Similar price declines were also recorded in Asia. Prices in the US Gulf Coast traded at an average of $1.0698 per gallon in June 2020 compared to $1.7595 per gallon in June 2019. Jet fuel prices have also fallen sharply for December 2021 delivery indicating a possible longer timeframe towards a significant recovery.
Looking further ahead, prices are expected to remain weak in 2021 and 2022, based on exchange futures data. Although the declines have become less steep perhaps offering some hope of a price recovery in the months ahead as passenger numbers return to flying.
In all three regions, jet fuel prices have also tumbled to steep discounts versus key distillate prices since the beginning of 2020, when the impact from the coronavirus peaked. Singapore jet fuel prices fell to as a low as minus $2.30 per barrel at the end of June versus Singapore gasoil (10ppm), compared to minus $0.10 per barrel 12-months earlier. European prices have followed a similar trajectory falling from a $5.80 per barrel (converted from metric tons for comparison purposes5) to $0.28 per barrel over the same period. US Gulf coast prices have mirrored these steep declines seen elsewhere with prices falling from $1.8148 per gallon to $0.8540 per gallon over the same period. This is equivalent to the price of jet fuel at approximately $602.15 per metric ton and $283.36 per metric ton6, respectively. It remains to be seen how long the downturn will last but further weakness may be expected as airlines struggle to get aircraft back into operation.
The futures market may be indicating early signs of a price recovery with futures prices showing a small rebound towards the end of the second quarter 2020 compared to the previous lows seen a few weeks earlier. Passenger confidence in flying will take some time to recover therefore, it is not clear yet whether this recovery will be sustained.
Spot or cash jet fuel prices have been volatile as traders remain uncertain about the short-term direction of prices in the immediate aftermath of the collapse in air travel. This volatility has been extended into the futures markets for the deferred contract months. The futures market for December 2020 contract month has seen the 20-day historical return volatility rise to over 100% in May 2020 before falling back slightly. The previous levels of volatility were between 10% and 25% over an 18-month period from January 2018 to June 2019.
A collapse in oil demand has impacted the refined products markets more broadly. This can clearly be seen in the broader distillate markets, to which they are tied.
In low sulphur gasoil, prices have fallen into a steep contango, reflecting the oversupply and lack of demand. In chart 3 below, the cost of carry between the June and December 2020 futures contract months for low sulphur gasoil fell to as low as -$75.75/mt (the equivalent to around $12.60 per month). Typically, the steeper the contango, the greater the storage incentive for the traders to store volume for delivery into a future contract month, provided that the cost of carry does not exceed the cost of storage over the period. The spread between December 2020 and December 2021 futures fell to below $50/mt with levels before staging a small recovery towards the end of June 2020.
In the first quarter of 2020, Jet Fuel futures volumes from Singapore to the US Gulf coast rebounded sharply from the seasonal low volumes during the fourth quarter when demand typically slows. According to exchange data, total volumes of Jet Fuel futures (all volumes converted to an equivalent in lots of 1,000 barrels using 7.88 barrels per metric ton) traded were 335,000 lots or 335 million barrels per month on average in the first quarter of 2020, up 174% from the first quarter of 2019. In the first quarter of 2019, total volumes in futures for jet fuel averaged around 192 million barrels per month. April to June 2020 volumes were 198,500 lots or 198.5 million barrels, an increase of around 10% from the same period 12-months earlier.
The collapse in global jet fuel prices from Singapore to the United States has also had a significant impact on oil refiners who typically supply the airlines with fuel. Many airlines have been forced to ground their fleets and it is not clear when flight schedules will return to pre coronavirus levels. In some cases, hedging volumes appear to have increased but at sharply lower prices. The futures markets are continuing to indicate that a similarly weak price outlook could remain over the high demand summer period and into the winter season of 2020.
1 IATA May 2020 https://www.iata.org/en/pressroom/pr/2020-05-26-01/
5 Jet fuel converted at 1 metric ton = 7.88 barrels.
6 Gulf Coast jet fuel converted at 1 metric ton = 7.9 barrels.