Liquidity returns to Singapore futures market as airlines boost jet fuel hedging

Liquidity in the Singapore jet fuel futures market picked up through 2023 as airlines boosted hedging fuel costs amid increased flight capacity and geopolitical risks.

However, structural changes to airline operations, such as fleet modernization after the pandemic, and lingering supply chain issues are likely to cap the length of hedging programs in the years ahead, analysts warned.

Total open interest in the Singapore jet fuel/kerosene futures contract on the Intercontinental Exchange from the front month to the 12th month forward over January-November surged 74.3% on the year to 368.96 million barrels, according to ICE data. Open interest reflects the total number of open positions in the contract and is an indicator of liquidity in the futures market.

Depth also returned to the market with a pickup in long-dated positions further along the derivatives curve.

Total open interest in the Singapore jet fuel/kerosene futures contract on ICE from the 13th month forward to the 24th month over January-November rose from zero at the height of the pandemic in 2021 to 1.47 million barrels in 2023.

"[Airlines] are really looking at adjusting their positions for next year on the assumption that geopolitical uncertainty will continue, if not even get worse," Shukor Yusof, primary analyst at Endau Analytics told S&P Global Commodity Insights.

While unrest continues in the Middle East and Eastern Europe, he said that tensions remain high in the Northeast Asian region, such as the Korean peninsula, a critical segment of Asia's aviation market, compounding geopolitical risks for crude and jet fuel prices in 2024.

Supply chain snags

Although hedging fuel costs primarily serves as a buffer against fluctuations in Brent crude and aviation fuel prices, airlines have had to adjust their strategy to also manage a now uncertain long-term flight schedule.

In its annual results for the financial year ended March 2022, for example, Singapore Airlines, the national carrier for Southeast Asia's largest international aviation hub, only reported a one-year hedging program.

In FY 2022-23, SIA's hedging program was extended to a six-quarter duration, with hedges placed through the third quarter of FY 2024-25, as global flight capacity rises.

This was, however, far shorter than the carrier's pre-pandemic hedging programs that could stretch as much as five years.

"Following the outbreak of the COVID-19 pandemic, there was a significant reduction in the group's capacity and hence fuel consumption, compared with prior planned flight schedules," SIA said in its FY 2022-23 annual report July 27. "Where the occurrences of these forecast jet fuel purchases are no longer highly probable, hedge accounting has been discontinued."

Analysts said supply chain issues that emerged through the pandemic will continue to plague the airline industry, impacting airlines' ability to forecast flight schedules.

"You put an aircraft in for a regular maintenance check, you don't know when it's going to come out," said OAG's Chief Analyst John Grant, adding that spare part availability was a key supply chain risk.

"So, while there is a need for hedging -- and it will continue -- if you've got [engine issues] that requires maintenance and checks, and there's fewer people to do those checks, and the [maintenance, repair, and overhaul] facilities are all fully booked, then proportionately, there is likely to be a reduced need for hedging," Grant said.

Weaker demand dims market depth

An ongoing recovery in the global aviation sector is likely to continue into 2024, with airlines expected to carry a record 4.7 billion passengers next year, according to the International Air Transport Association.

However, the growth in 2024 was unlikely to match gains seen in 2023, IATA said, a sentiment that was echoed by analysts S&P Global spoke with.

Macroeconomic stresses such as inflation are likely to tighten consumer spending with so-called 'revenge spending' tapering out, the analysts said.

Structural changes to airline operations could also potentially influence their hedging strategies moving forward as carriers lower jet fuel consumption.

"When you look at the capacity data that we've got at the moment, everyone says global capacity is nearly back to where it was and it's about 3% short of 2019," OAG's Grant said. "But actual flights scheduled is about 8% down because airlines are using larger aircraft type."

Airline fleet modernization beyond the pandemic has also brought in more fuel-efficient aircraft types that could moderate jet fuel requirements for carriers going forward.

Platts, part of S&P Global, assessed the Singapore jet fuel/kerosene front quarter Q1-Q2 derivative time spread -- an indicator of long-term sentiment -- at an average of $2.67/b over Oct. 1-Dec. 12, down from Q3 2023 average of $4.37/b and Q4 2022 average of $5.59/b.