Prices have jumped, partly because of swelling travel demand as China eases its Covid restrictions
Bob Henderson, WSJ
EnergiesNet.com 02 06 2023
Airfares have eased from last year’s highs. Now a resurgence in jet-fuel prices is threatening to push them higher again.
Prices for the kerosene-based product have been climbing since December, propelled by diminished supplies after winter storms shut down refineries. Swelling demand has also pushed up prices, as millions of Chinese travelers took to the skies to celebrate the Lunar New Year and newfound freedom from Covid restrictions.
The global jet-fuel price index maintained by S&P Global is up 20% since Dec. 7, while prices on the U.S. East Coast are up about 77%.
While global demand for gasoline and diesel has already recovered from its pandemic downturn, jet-fuel consumption is just now taking off. The International Energy Agency forecasts that jet fuel will drive 44% of the 1.9 million barrels a day of global oil-demand growth that it expects this year, after accounting for less than 6% of demand last year, according to research firm Rystad Energy.
Russia’s invasion of Ukraine in February 2022 sent refined oil-product prices soaring, after Western sanctions curtailed Russian exports. Last June, S&P Global’s jet-fuel index shot up to $4.33 a gallon, near its highest level ever.
Meanwhile, the U.S. ended 2022 with its lowest inventories of jet fuel since 1996, according to Energy Information Administration data. Fresh sanctions on Russian refined products set to start Feb. 5 threaten to further affect global supplies.
Even with the recent run-up, jet-fuel prices have yet to hit last year’s highs. That is because jet fuel’s price is the sum of the cost of the crude oil needed to make it and a premium charged by its makers and distributors, and crude-oil prices are down about 37% since last June. The S&P Global index is now at roughly $3.10 a gallon.
It is jet fuel’s premium to crude and other products that has surged recently. Although Gulf Coast jet fuel typically trades at a slight discount to diesel, in January it appreciated to a premium of 38 cents a gallon, the biggest spread since 2008.
Airfares are up sharply from the pandemic-depressed prices that defined parts of 2020 and 2021. Higher fuel prices boosted airfares last year, and so did worker shortages, higher labor costs and strong demand from consumers eager to splurge on big vacations. The recent run-up in jet-fuel prices has yet to be fully priced into airfares, analysts said.
An upswing in Asian flight activity, particularly after China’s cancellation of Covid-19 travel restrictions on Jan. 8, is driving a jump in demand for jet fuel. Demand bested last year’s levels by 33% in mid-January, according to consulting firm Kayrros, which tracks flights and employs aircraft-model data to estimate consumption.
Asia significantly lagged other regions in recovery,” said Kayrros co-founder Antoine Halff. He said Asia has reached only 78% of its prepandemic level of jet-fuel consumption, compared with 96% for North America and 87% for the world.
Some U.S. fliers have been bewildered by skyrocketing fares.
Lacy Warner, a writer and film producer from Providence, R.I., is flying to see her parents in Jacksonville, Fla., later this month so they can help care for her 1-year-old daughter while her husband is traveling for work. Her sister helped out and bought a ticket for her using air miles when Lacy couldn’t find one for less than $600.
“Oh my God, why?” Ms. Warner said, adding that the prices were more than double what she usually pays. “It is really hard to understand where this is coming from.”
But domestic airfares, on average, haven’t yet reacted to the recent rise in fuel prices, according to data from travel-booking app Hopper. Some travelers are seeing high prices, said Hopper’s lead economist, Hayley Berg, because airlines have adapted to increased fuel costs and staffing constraints by shifting capacity to larger planes flying between major hubs, leaving smaller airports such as Jacksonville with less competition and inflated fares.
Last year, when demand for flights was high and supply was scant, airlines managed to pass all of their additional fuel expenses on to customers within six months, said Raymond James airline analyst Savanthi Syth. This year, airlines’ reaction to rising fuel costs “will probably take a little bit longer,” she said.
Still, jet fuel’s run could be stopped short by the oil market’s reaction to it, said Vikas Dwivedi, global oil and gas strategist at Macquarie Group. Refiners in China have room to increase production. New refineries there and in the Middle East are scheduled to start by the middle of this year. And refineries all over can “yield switch” to expand jet-fuel production by reducing production of diesel and gasoline.
“You could simultaneously grow jet demand in a big way,” Mr. Dwivedi said, “and then meet that demand through all these different items.”
Write to Bob Henderson at email@example.com
Appeared on The WSJ in the February 3, 2023, print edition as ‘Fuel Costs Threaten to Lift Airfares’.