Europe's jet fuel market is poised to remain tight in 2023, driven by a continued recovery in demand for air travel and constraints on supply.
The IEA expects global use of jet-kerosine to increase by 13pc next year, outpacing demand growth for any other refined oil product. Meeting the anticipated rise in demand faces a number of headwinds in Europe.
Firstly, regional supply will be impacted by the EU's upcoming ban on Russian refined product imports. Europe relies heavily on Russia for diesel and the supply gap caused by the halt of Russian imports will be significant, exacerbated by historically low diesel stocks in the region. If this results in European diesel prices increasing at a substantially faster pace than jet fuel values, it will incentivise local refiners to maximise diesel yields at the expense of jet fuel.
With Europe becoming more reliant on jet fuel imports from markets east of Suez, another factor that could weigh on supply in the region next year is the cost of freight. Since Russia's invasion of Ukraine in February 2022, the geopolitical uncertainty has driven up insurance premiums, buoying clean tanker rates towards record highs for the majority of global routes.
A third factor that could constrain supply in Europe is lower availability of Chinese imports. Europe has been importing much more jet fuel from China this year, with 1.1mn t arriving in 2022, much of it in the fourth quarter, compared with 614,000t in 2021, according to Vortexa data. Imports on this scale are not guaranteed in 2023. The Chinese government significantly raised its export quotas in September in response to subdued domestic demand for air travel in the wake of the country's stringent Covid lockdowns. With the country now opening up, domestic demand is poised to increase and exports fall.
On the demand side, air travel in Europe is expected to continue its recovery from the pandemic in 2023, although the scale of the rebound is uncertain given the gloomy economic outlook for the region. The cost of living crisis, caused by rampant inflation, could weigh on appetite for foreign travel in 2023. Airlines also remain under significant financial strain, which, combined with stubbornly high rates of inflation, will maintain upward pressure on air fares. Furthermore, the prospect of more wage strikes by airline and airport workers risks flight cancellations next year, as happened in 2022.
The demand recovery has been uneven across Europe this year. Airports in business and holiday hubs like London and Spain have exceeded 80pc of their pre-pandemic passenger volumes, while airports in other areas such as in Scandinavia are below 70pc of their 2019 passenger numbers. Europe has also experienced uneven exposure to the fallout from the Ukraine war, with air travel demand in the Baltic region more directly affected than elsewhere in the continent.
