Commodities | Jul 17 2008
By Chris Shaw
Given it is a specialised market jet fuel prices are very much subject to supply and demand factors and as economic activity weakens across the globe Standard Chartered suggests jet fuel demand is likely to weaken.
A range of factors support the group’s view, with the rising cost of the fuel a major one given prices on the Singapore exchange of late have nearly doubled in year-on-year terms to US$175 per barrel. At the same time as the airlines are facing higher fuel costs (fuel is estimated to account for 30% of operating costs on average) they are experiencing reduced demand given the slowdown in economic activity and this is also expected to feed through to lower demand for jet fuel.
International Air Transport Association numbers suggest global passenger growth in 2008 should decline to 3.1% from 5.9% previously, while cargo growth is expected to fall to 3.1% from 4.1%. One issue for the airlines is business travel as it is a major profit and revenue contributor but declined in the March quarter by its largest amount since 2003.
This weaker passenger growth should flow through into weaker demand growth for jet fuel, Standard Chartered forecasting an increase of just 0.2% this year followed by a fall of 1.4% in 2009. The US is expected to be a major contributor to this decline as it accounts for one quarter of global demand and the economic downturn it is currently experiencing is expected to see demand continue to contract into next year.
While the Middle East and China will offset this to some extent Standard Chartered points out these two regions together only account for 10% of total global demand and so won’t be enough to fully offset weaker numbers in the US.
As well seasonal jet fuel stocks are quite high at present, Standard Chartered noting this is in large part due to refineries maximising production of middle distillates given higher margins at present. These margins are forecast to come down in coming months though as refiners react to lower demand and it is this that should see prices come off their recent peak in the group’s view.
Factoring all this into its model sees Standard Chartered forecast an average jet fuel price for 2008 of US$146 per barrel, while it sees the price trading at a discount to gasoline prices through the rest of this year and next year. As a result it expects jet fuel cracks (the refiner’s margin) to fall from current levels of around US$35 per barrel to an average of US$29 per barrel this year and US$22 per barrel in 2009.