Jet fuel demand hit by Omicron; recovery delayed until 2023/2024

Abstract

The aviation sector was optimistic for continued recovery in 2022 following two challenging years battling the Covid-19 pandemic. But flight disruption from Omicron may prevent a recovery to 2019 levels until 2024. By then sustainable aviation fuels (sustainable aviation fuel [SAF]—see survey) and more efficient aircraft may start chipping away at conventional jet fuel growth. The emergence of the omicron coronavirus variant has led to widespread flight cancellation over the festive period and temporarily set back the prospects of a full recovery in the global jet fuel market—the sector most affected by the pandemic in 2020 and 2021. Airlines removed many millions of seats from their planned capacity for the first quarter of 2022 leading up to Christmas, with further cuts over following weeks—although concern has eased somewhat as January has progressed, given the new variant's lower severity among the vaccinated. Before Omicron, the International Air Transport Association (IATA), which represents some 290 airlines comprising 83% of global air traffic, had expressed cautious optimism for domestic aviation sectors in 2022. It predicted domestic activity would reach 93% of 2019 levels, while international routes would trail with levels of just 44%. By the end of the year, projections ranged from a 75% traffic recovery in Europe, to 65% for the North Atlantic and just 11% in Asia. Given the hit in Asia, Energy Intelligence says overall global jet fuel demand will only reach 6.2 mn bpd in 2022, 20% below its peak in 2019; and just 6.9 mn bpd in 2023. Jet fuel demand uncertainties could weaken global oil demand forecasts—in contrast to 2009 to 2019 when global air traffic growth meant jet fuel was a reliable 4%/ yr contributor to overall oil demand growth. Airlines also face huge operational challenges due to the pandemic, while jet fuel prices are at 7-year highs. There is also increasing pressure from low carbon regulations and costs, as well as from passengers who want to minimize their carbon footprint. IATA says the EU's Fit for 55 package to reduce emissions could add €39 billion to annual airline expenses by 2035—nearly twice the €22 billion industry-wide profit in 2019. Meeting the net-zero target requires massive outlays for SAF purchases and carbon offsets. What is more, it is steadily rising— voluntary and mandated carbon prices are setting regular price records in the EU and United Kingdom. The collapse in demand has also affected jet markets directly. Spot barrels in the Singapore jet fuel market fell sharply in December, and prices dipped around the time of the Omicron announcement. However, the relative price weakness did not last long because the market and refiners were able to quickly react and adjust product yields—producing more diesel and gasoline instead. IATA has called for governments to follow the World Health Organization advice and immediately rescind travel bans that were introduced in response to the virus, but so far, many countries have ignored this—notably, China, which has some of the most draconian international travel restrictions.