and will that help the asthmatic oil tanker market?
The US Transportation Security Administration (TSA) says that it expects record levels of arrivals into the US for Independence Day this year. It estimates that 2.82 million travellers arrived in the US last Friday and that 17.7 million will arrive over the week starting last Friday. The previous peak Independence Day arrival number was 2.79 million in 2019 before the pandemic.
The return of air travel is one of the features of the recovery from the pandemic. The latest data from the International Air Transport Association (IATA) are for February this year and they show that domestic air passenger traffic rose 56% compared to February 2022, while international traffic was up 90% year on year in February 2023 led by traffic in the Asia-Pacific. Domestic travel in February was back to 85% of February 2019 levels while international traffic was back up to 78% of February 2019 levels. “Despite the uncertain economic signals, demand for air travel continues to be strong across the globe and particularly in the Asia-Pacific region. The industry is now just about 15% below 2019 levels of demand and that gap is narrowing each month,” said Willie Walsh, IATA’s Director General.
IATA data show that passenger load factors are back to 78% globally, with the highest PLF in Latin America at 81% and the lowest in Europe at 75%. North America is back to 77% while Assia-Pacific is at 79%, Africa at 76% and the Middle East at 80%. IATA reckons that 4.35 billion seats will be sold in 2023, which is closing in on the 4.54 billion who flew in 2019. It also notes that air cargo is not doing quite so well: cargo volumes are expected to be 57.8 million tonnes, which has slipped below the 61.5 million tonnes carried in 2019 “with a sharp slowing of international trade volumes” according to its 5 June press release.
I conducted a straw poll on Twitter today, asking “Business flyers: are you flying more or less compared to before the pandmeic?” The entirely self-selecting and unrepresentative response indicated that 12.5% of respondents are flying more, 18.1% are flying the same, and 58.3% are flying less. The remaining 11.1% voted “other” and were asked to comment, but only two did, one effectively saying “the same” and on saying they had stopped flying altogether, the same as saying “less”.
Despite 58% of business flyers in my poll saying they are flying less than before the pandemic, airlines are returning to profitable growth: industry net profits are expected to reach $9.8 billion in 2023 (1.2% net profit margin) which is more than double the previous forecast of $4.7 billion (December 2022). This follows $183.3 Bn of net losses for 2020-2022, the deepest losses in aviation history, equal to an average net profit margin of -11.3% over that period. The airline industry entered the pandemic at the end of an historic profit streak with a net profit margin of 4.2% for the 2015-2019 period.
Jet fuel demand in the US looks like it may recover its previous peak of 1.74 Mn bpd in 2019 either this year or next year. Some tanker market analysts are getting excited about this but let’s remember that jet fuel is only a few percent of the total refinery slate. Furthermore, aircraft are becoming more efficient. The latest Arirbus A320 is 15% more fuel efficient than the last generation. The latest Boeing 737 MAX is 20% more fuel efficient than the previous version. In its latest report, the IEA says that global jet fuel use “is unlikely to surpass its 2019 peak until 2027, when demand will exceed 7.2 Mn bpd.” The IEA notes that “environmental regulations and commitments, combined with changing consumer behaviour, will also weigh on demand.”
There is also the rise of biofuels to watch out for. The IEA thinks that the rise of biofuels and “processing gains” (more efficient refining) can together meet all the increased demand in oil between 2023 and 2028. This may not do much for decarbonising air transport. Last year airliners in the US consumed 15.8 Mn gallons of sustainable aviation fuel, that’s about 1,600 bpd, according to US Govt data. Frankly, aviation is only at the start of its journey to decarbonisation, just as shipping is.
Annual US Jet Fuel Demand (Source: US Govt data)
Jet fuel prices are supportive of aviation, having drifted down from over USD 500 per tonne to around USD 250 per tonne in the last two years, as per IATA data -
Importantly, oil prices look set to stay low. While Saudi Arabia has apparently today extended its 1 Mn bpd voluntary production cut for July into August, it is also said to have cut its prices for Asian buyers by 50 cents.
But if the IEA is right, then Saudi will have to cut harder to offset the rise of non-traditional sources of liquid hydrocarbon fuel. Furthermore, non-Opec supplies could replace Saudi cuts easily. Oil consultancy Energy Intelligence forecasts 2H23 oil demand will grow by 1.4 m bpd, but non-Opec-plus producers such as the US, Brazil, Norway and Canada, are expected to crank out an additional 1.5 m bpd during that period with the US providing half of that total.
At the time of writing, the FFA market is pricing in strong gains on the USG-China VLCC route for August, with many brokers firmly of the belief that the loss of more Saudi barrels from the market will mean Asia sourcing more barrels from the Atlantic.
Perhaps this optimism can counter the sudden and unexpected death of this year’s promised tanker supercycle. Even I fell for the siren song of a tiny orderbook and strong oil demand growth, along with most of the market, back in Q1 this year. As of early July however, crude oil tanker markets are behaving much as one would expect, sitting in a seasonal slump. Traditionally, one would treat the VLCC freight market like the US stock market: go away in May and stay away ‘til Labor Day (4th September this year). Recent seasonal patterns confirm this.
So if the VLCC market picks up in Q3, it may be down to Asian refiners buying Atlantic barrels to replace withheld Saudi Barrels. But that doesn’t make a long-term trend as Saudi can always switch production back on. But all this supply does suggest – as transport fuel demand volumes struggle to return to pre-pandemic levels – that we may be entering an extended period of oversupply and, all things being equal, lower oil prices. That may be of some relief to ship operators as the IMO considers a fuel levy this week at MEPC 80, of which, more next week.
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