JET FUEL: HOW HIGH A FLYER? DEMAND, SUPPLY, AND THE ENDLESS QUEST FOR EFFICIENCY
From just-in-time inventory management to the expansion of global trade and tourism, air travel makes the world go 'round. For the past three decades global air traffic has grown 5.5 percent annually, outpacing economic growth by nearly 2.5 percentage points. This trend is expected to continue, and air traffic should double by 2020 from the 2005 level. Given such strong growth and the current refining bottlenecks, concerns have arisen regarding the long-term price and availability of jet fuel. Will the oil industry manage to keep pace with jet fuel demand growth? In this Private Report, CERA examines jet fuel market trends and draws three conclusions:
*Global jet fuel demand will grow at a slower pace than air traffic until at least 2020. Continuous efforts by air transport industries will improve efficiency through engine and airframe design, higher load factors, and improved operations. CERA estimates that jet fuel demand will increase by one third between now and 2020, with a 2 percent annual growth rate well below the 5 percent growth expected for air traffic growth.
*Global jet fuel production capacity will remain sufficient. Regional imbalances will not only develop and generate a larger global jet fuel trading market, but also may add to security of energy supply concerns for the main importing markets, Europe and North America.
*Jet fuel will maintain a price premium to crude higher than historical values. Because synthetic jet fuel is still in the research stage, jet fuel requirements will continue to compete with diesel in the same middle distillates refinery cut. Refiners worldwide will be challenged by a rate of demand growth that is higher for diesel than for other fuels, sustaining jet fuel's relative premium to crude. As a consequence, airlines wishing to hedge should buy long-term gasoil paper contracts rather than crude oil.
