In June, the global oil market seemed on the brink of a strong comeback, driven by an anticipated rise in jet fuel demand. The International Air Transport Association (IATA) predicted record-breaking passenger numbers this year, fueling hopes for a robust recovery in the aviation sector. At that time, Oilprice.com highlighted the potential for increased jet fuel demand to boost oil prices, offering a promising outlook for the oil and gas industry. A June 21st analysis from JPMorgan supported this optimism, noting that global jet fuel demand had already exceeded pre-pandemic levels, signaling a recovery in one of the key segments of oil consumption.
However, the optimism of mid-2024 has since been dampened by recent developments. Airline operators and travel companies are increasingly concerned about the impact of shrinking disposable incomes on consumer spending and air travel. Combined with a slowdown in global trade, these factors have led to a reassessment of the aviation sector’s prospects.
Jet fuel, which is the fourth-most-used petroleum product in the United States, averaged about 1.56 million barrels per day (b/d) in 2022, accounting for around 8% of total petroleum consumption, according to the U.S. Energy Information Administration (EIA). This highlights the aviation sector’s critical role in the overall oil market. The current stagnation in jet fuel demand is raising concerns about a broader potential downturn in oil demand.
Globally, jet fuel demand has averaged 7.49 million barrels per day so far this year through July, according to Goldman Sachs data cited by Reuters. This represents a 500,000 bpd increase from the same period last year. However, Goldman Sachs expects this increase to slow to 400,000 bpd for the remainder of the year. This projection suggests that 2024 may fall short of Goldman’s full-year predictions of a 600,000 bpd average, a target that now seems unreachable unless jet fuel demand surges in the second half of the year.
One factor contributing to the subdued outlook is the improvement in aircraft fuel efficiency. The International Energy Agency (IEA) reported in April that the demand for jet fuel and kerosene was lagging behind the increase in global miles flown. This gap is largely due to advancements in fuel efficiency technologies, enabling airlines to operate with less fuel per mile. As a result, even though air traffic has exceeded pre-pandemic levels, the growth in jet fuel demand has not kept pace.
This efficiency-driven decoupling has both positive and negative implications. On the one hand, it is beneficial for airlines aiming to reduce operational costs and their carbon footprint. On the other hand, it poses a challenge for oil producers and refiners, who now face the prospect of a potentially permanent reduction in one of their key markets. The IEA, often criticized for its cautious oil demand outlook and optimistic view of the energy transition, has suggested that this trend in jet fuel demand could persist, potentially capping its growth even as air travel continues to recover.
But efficiency improvements are only part of the story. The current economic climate is putting additional pressure on the aviation sector. Inflation is eroding consumer spending power, leading to a decline in discretionary expenses like air travel. This is particularly troubling for long-haul and international travel, which are more sensitive to economic downturns. With average U.S. consumer spending growth at just 0.3% in the March-May period—the slowest increase in over a year—airlines are scaling back their growth projections and tempering their capacity expansion plans.
The implications for oil demand are significant. Jet fuel is a major driver of global oil demand, and any sustained weakness in this sector could ripple throughout the industry. Refiners may need to adjust their production strategies to account for the reduced demand for jet fuel, and even the fear of a potential reduction in global oil demand could have a profound effect on global crude oil prices and futures.
The jet fuel demand situation is further complicated by broader challenges facing the global economy. Geopolitical tensions, supply chain disruptions, and shifting trade patterns are all contributing to a sense of uncertainty that is already weighing on the oil market. The recent decline in jet fuel consumption is just one aspect of the complex landscape that industry players are navigating.
The recent slowdown in global jet fuel consumption serves as a stark reminder of the ongoing challenges facing the oil and gas industry in a post-pandemic world. While the initial recovery in jet fuel demand was a welcome relief, the current decline is causing renewed concern in the market.