Jet fuel prices are set to continue trading at relatively high levels during the second half of 2014 as global air travel demand improves. Geopolitical tensions will keep the chance of short-term price spikes in the picture.
World air passenger traffic is on course for steady growth into 2016, according to the International Civil Aviation Organisation. The ICAO forecasts passenger traffic - measured in passenger-kilometres performed (PKP) - will increase by 6pc in 2014, by 6.3pc in 2015 and by 6.5pc in 2016.
Freight traffic is also expected to increase by 3.7pc, 4.2pc and 4.4pc in 2014, 2015 and 2016 respectively, from the dismal 0.4pc growth recorded in 2013.
The brunt of the growth will come from carriers in the Middle East, with an estimated growth rate of 11.6pc this year. But the ICAO predicts European passenger traffic will rise by 5.4pc in 2014. "Europe's general economy has shown steady improvement in the first half of the year and the recovery trend is expected to continue in the coming months," the ICAO said.
The price of jet fuel traded in a relatively narrow and high range between July 2013 and July 2014. Cif northwest Europe prices averaged around $124/bl over the period, with short-term spikes caused by geopolitical concerns. Jet fuel cargo prices recently spiked in northwest Europe, reaching $128/bl in mid-June as tensions in Iraq drove up crude prices. Concern over Ukraine also translated into jet fuel price increases in mid-May.
Geopolitical tensions are set to continue to pressure oil prices upward in the coming months. Combined with rising oil demand – on the back of improved economic data from China especially - this sets the scene for higher jet fuel prices. But there is caution about China, as the Chinese economic growth is seen weakening by airline industry body Iata.
Storage economics could also come into play. A widening contango in Ice gasoil - on which jet fuel prices are calculated - would encourage a building of stocks, keeping product off the spot market, and pushing jet fuel prices up.
The European market remains highly dependent on jet fuel bookings from Asia and the Mideast Gulf, which account for 80pc of Europe's imports. And Europe's jet fuel deficit is set to grow as more refineries cut runs or close because of weak margins. Since 2009, domestic European jet fuel production has decreased by 1.5mn t/yr and, in 2013, over a third of Europe's jet fuel demand was met by imports, according to Citi bank.
But airlines focus increasingly on fuel efficiency measures to reduce their consumption, since jet fuel accounts for around 30pc of their operating costs. Older aircraft are gradually retired and replaced by fuel efficient airplanes. More than half of the 1,400 new airplanes ordered by airlines worldwide come as a replacement for older equipment, according to Iata.
Airlines also tend to maximise load factors in order to increase profitability. Air Berlin, the second-largest airline in Germany, consumed 3.3 litres of jet fuel for each 100 passenger kilometres in 2013, and reduced its jet fuel use by 25pc over 20 years. That said, the IEA still sees transport sector oil use, including air transport, rising steadily through 2019, as traffic growth offsets fuel efficiency measures.
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