Listen: Is Asian jet fuel demand stalling as aviation recovery struggles for a lift?

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Neo Rong Wei:

Hello and welcome to the Platts Oil Market Podcast, a series by S&P Global Commodity Insights. And today, we're breaking down the impact of Asia's aviation recovery on regional jet fuel markets, as well as the turbulence that lies ahead. It was one of the hardest-hit sectors during the pandemic, yet the aviation industry quickly picked itself up and its recovery was touted to be a key demand driver for oil in this region.

In recent months, passenger capacity has been on the rise with some segments of the market even surpassing pre-pandemic levels. But even as revenge travelers and business executives take to the skies ahead of peak summer demand, the Asian jet fuel market appears to be falling far short of initial expectations.

The recovery in international routes, which are key drivers of jet fuel demand, still largely lags behind domestic ones. And demand from Asia's largest market, China, seems to have ways to go compared to its pre-pandemic performance. Now let's unpack what these mean for the market, as well as this wider impact on the region's oil demand.

I am Neo Rong Wei, Asia Oil News Editor. And I'm joined by associate editors, Lee Shu Ling, who covers the regional jet fuel and kerosene market, as well as Ernest Puey who looks after our derivative markets under the plant's forward curves. So to start things off, Shu Ling, could you give us a sense of the expectations around jet fuel demand as we head into peak summer season?

Shu Ling Lee:

Hi, Rong Wei. Of course. Overall, the outlook for the aviation sector has been optimistic. The industry has shown resilience in its recovery post-pandemic in both leisure and business sectors. And with the summer travel peak, we can expect jet fuel demand to rise in tandem with the uptick this season.

There have been signs that have reflected a robust recovery in travel demand in the lead-up to summer. Take Japan, for example, the country's tourism office reported visitor arrivals of over three million for a third straight month based on their latest data from me.

Along with its position as an aviation transit hub, Japan has been one of the key destinations for global tourism in the lead-up to this summer peak. However, a slow recovery in China's international flight capacity poses a concern to the region's aviation demand. Chinese travelers who were previously the biggest proportion of Japan's tourists, are still about 30% lower than pre-pandemic levels.

Rather, we've seen a strong uptick in domestic travel within China as Chinese consumers favor traveling within the country rather than outbound tourism. That's [inaudible 00:02:55] the Eat Out [inaudible 00:02:56] festivities in June are expected to keep a flow on prices this summer.

Our analysts expect that the Hajj pilgrimage will attract around two million Muslims to Mecca, boosting demand for aviation fuel. Reflecting this, Indonesia's Pertamina sold via spot tenders about one million barrels of jet fuel for June delivery and about 1.2 million barrels for July. This is significantly higher than the volume sold in April and May, which were about 600,000 barrels each.

Neo Rong Wei:

I see. Then Shu Ling, could you share more about the supply landscape here in Asia then?

Shu Ling Lee:

So while the region's aviation activity has grown, this has not directly translated into gains for the Asian jet fuel market as the complex grappled with supply-side issues. Previously, persistently poor arbitrage economics that sent barrels to the US West coast and Europe caused a glut in the region's jet fuel supply.

The Asian jet fuel market structure flipped into contango in mid-April and market participants attributed the bearish shift in the complex to this ballooning of regional supply. But now that freight costs have come off and stabilized, market participants recently shared that arbitrage opportunities to send vessels to the US West Coast and Europe are opening again.

Still, lack persist as Chinese jet fuel exports show no signs of letting up this year. Over January to May, jet fuel outflows from China totaled almost eight million metric tons. In comparison, gasoline and gas oil exports over the same period, roughly half the volume each. And of course, if the arbitrage economics to Europe are unable to hold up, we can expect to see a tendency to the downside for the Asian jet fuel market.

Neo Rong Wei:

So over to you Ernest. Could you share with us how are the airlines and the region doing?

Ernest Puey:

Well, Rong Wei, it really depends on who you ask, right? Because if you look at associations and the airlines, they've been painting a relatively rosy picture in terms of earnings and capacity growth. So indeed, of course, there's no doubt we've been seeing carriers continuing to expand the networks amid that steady increase in passenger and cargo demand.

But the market watchers out there that are voicing a lot of concern and caution in terms of their outlook for the sector and their expectations for jet fuel demand for flights. Now, the concerns generally include a lot of longstanding supply chain snags that have disrupted maintenance schedules.

That has also in turn affected the ability of airlines to plan the capacity down the road. Now here at Platts, we have been tracking the open interest for the Platts Singapore jet fuel kerosene contract on ice, and that's seen as an indicator of hedging activity by airlines.

Now what we've seen is a steady increase in the market's liquidity from 2023 as global aviation began to pick up, as well as after the lifting of restrictions in China. Now, while we have seen liquidity deepen in the market, especially when it comes to the longer-dated contracts, it is not yet where it was in pre-pandemic times.

So based on the financial reports we look at, airlines are still very much hesitant in extending the duration of the hedging programs to what they were before COVID-19. And that has been attributed to the lingering uncertainty over flight maintenance schedules despite the growing passenger demand.

We are hearing that airlines say that if a plane goes into maintenance, they can't be sure when it's going to be coming back out again. So these supply chain uncertainties also including ground issues and reports of jet fuel shortages, staff shortages on the ground, such as in areas in Japan, that has hit flight scheduling abilities for the airlines and in turn, the outlook for jet fuel.

Neo Rong Wei:

And of course, there are macroeconomic factors at play here as well, right? Could you tell us more about that?

Ernest Puey:

Yeah, absolutely. Right. So here in Asia, Rong Wei, the operating costs are one of the key issues at hand. That has been on the rise, if you consider the elevated borrowing costs globally and the stronger US dollar.

Now, when you think of the biggest airlines and the biggest players here in Southeast Asia, for example, you have Lion Air from Indonesia, Air Asia, Malaysia, and these sort of airlines and carriers. They're big, but they can be struggling against the currency front, especially as the greenback gets more and more expensive and stronger.

Now, that also adds to the burden for consumers who may find traveling out of these markets even more expensive than it used to be, right? Rong Wei, you have been traveling a lot recently. We've seen it all over social media, but I mean, have you seen the price of air tickets recently? They're really, really high, and that's it.

Of course, when it comes to the macroeconomic environment, there are two sides to the coin, right? The weakness in some Asian currencies on the flip side, has made these destinations a lot more attractive to holders of other more developed market currencies, for example.

So if you look at the Thai baht, the Indonesian rupiah, Japanese yen, these have very much been struggling against the US dollar. And these are, of course, some of the biggest tourism markets here in Asia too.

Now, some sources are attributing the ongoing jet fuel shortage in parts of Japan, for example, to just that sheer amount of tourists that are entering the country. And that, of course, has been given a boost by the weak yen. So at the end of the day, it's a bit of a balancing act between two forces when we think of the macroeconomic environment, as well as the currency play here.

On the one hand, we have inflationary pressures that are biting into consumer demand. While on the other hand, we do see destinations becoming more attractive amid currency moves. Add to that, the uncertainty in terms of the outlook for global economic growth, right?

So we have analysts who are talking about a potential slowdown in economic growth, and that, in turn, has an impact on consumer discretionary spending. And among the many luxuries that you might want to commit to and might not want to commit to in such a landscape, the one thing you could let go of often is the luxury holiday that could be hold off for another quarter or two.

Neo Rong Wei:

So Shu Ling, could you tell us what does all these factors mean for jet fuel demand in the road ahead?

Shu Ling Lee:

Well, our research and analytics show that the Asian jet fuel kerosene demand growth will remain strong at around 320,000 barrels per day year-on-year in Q2. That's as global and regional air travel demand is expected to remain elevated, largely pinned on hopes of a recovery led by China and Southeast Asia.

In 2024, we expect to see a growth in the annual jet fuel kerosene demand here in Asia, but at a slower pace compared to 2023. Given the low base effect from the pandemic. On the supply side, output in Southeast, Asia is expected to grow in Q2 alongside the increase in demand.

Although Japan is set to see a dip in production in the same period due to refinery capacity rationalization and lower kerosene consumption, thanks to a milder winter. In Q3, Asia's jet fuel production is further expected to register an annual increase of 12,000 barrels per day amid continued demand growth.

Neo Rong Wei:

And Ernest, so could you tell us how big of a role is jet fuel playing in terms of supporting broader crude oil prices and demand here in Asia?

Ernest Puey:

Yeah, Rong Wei. So certainly, market watchers are seeing jet fuel as a critical contributor to crude oil demand in Asia. That's especially given the optimism surrounding the market here and somewhat of a low base that kind of still lingers on following the slightly later emergence from the pandemic, especially in the key market of China.

But that said, the core distilled gas oil is still holding onto the title of the king of the barrel at this point, right? If you look at transportation fuels, as of late June, gas oil cracks are trading at a premium of about $1.50 per barrel to jet fuel cracks.

Gas oil cracks are about three times that of gasoline at this point. And that is, of course, given the context of industrial activity in Asia being very much sluggish as they are right now. And if we were to look at the economic indicators in the region, it has a long way more to go, especially in the heavy industrial areas of manufacturing, for example.

So while jet fuel is not fully lived up to its earlier expectations, you must think of it in terms of the context of where gas oil is playing, for example, and the broader weaknesses in crack spreads at this point in time.

Now, certainly as Shu Ling mentioned, the warmer winters are also adding to the drag and the soft demand expectations for kerosene that typically pulls out some volumes out of jet fuel output. But think of it this way, right? It's important to look at the overall fuel demand in Asia as a whole.

Looking at the macroeconomic weakness that is dragging on demand drivers for crude, and that jet fuel, for all the expectations that it had on its shoulders, has yet to ascend to cruising altitude where it can sail through to the clearer skies that are most certainly ahead.

Neo Rong Wei:

I see what you did there. So thank you so much for all of your insights. That was Ernest earlier with his comments on jet fuel cracks and as well as its implications on the wider crude market. While earlier, we've also heard from Shu Ling on the outlook of jet fuel here in Asia.

So we've covered a lot of ground in today's podcast. And I'd like to thank you, the listener, for staying with us as well. Also, a huge thank you to digital content editor, Shikha Singh, for putting this episode together.

Now for further insights into the Chinese and global markets, our Beijing Commodity Market Insights Forum will be happening on July 16th and 17th at Four Seasons Beijing. The forum boasts a lineup of our industry experts, offering clarity across different commodities and energy streams. Now, for more information, do check out the registration link in the show notes below. Thanks for listening.