Commentary: No, the Iran war won’t ground your European holiday flight
The invisible hand of the market is doing enough to keep most planes flying, says Javier Blas for Bloomberg Opinion.
by Javier Blas · CNA · JoinRead a summary of this article on FAST.
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LONDON: My family-and-friends WhatsApp chat tracks the ups and downs of commodity markets. Whether it’s when to switch utility provider or purchase olive oil, I’m everyone’s in-house analyst.
Unsurprisingly, the question du jour is whether the US-Iran war will ground European summer holiday flights. For now, the answer is no.
Advising family and friends has no upside - and lots of downside. Thus, I have caveated my messages with the usual disclaimer: The US-Iran ceasefire may collapse and the war restart. But barring a worst-case scenario, the invisible hand of the market is already doing enough to keep most planes flying.
From a pre-war level of about US$100 a barrel, wholesale jet fuel prices in the northwest European and Asian markets shot up to a record high of over US$230 a barrel in early April. Since then, they’ve fallen 30 per cent to about US$165 a barrel. Cathay Pacific, one of the largest carriers in Asia, recently said it would cut jet fuel surcharges in response to dropping wholesale prices.
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European airlines, which also panicked initially, are sounding more confident. "Let me be clear on fuel availability: We are not currently seeing jet fuel interruptions and we do not expect supply issues this summer," Luis Gallego, chief executive officer of IAG, told reporters earlier this month.
DIFFERING RISKS
Tickets, for sure, would be more expensive; the odd disruption may occur, too. And not every route faces the same risk. Netherlands to Greece? That’s fine, with both countries net jet fuel exporters. Poland to Portugal? That’s low risk, too. Austria to Spain? It shouldn’t be a problem, with neither relying too much on foreign supply.
But what about UK to France? That’s trickier, as Britain has tiny national inventories and only covers 25 per cent of its needs domestically, and France is also a significant importer.
More than physical shortages, I worry about airline executives getting the math wrong: If they didn’t lock up their fuel prices in advance, but pre-sold the tickets, some charter companies may find themselves flying deeply loss-making planes. I can see some charter holiday companies going bankrupt, triggering cancellations.
In addition, those who need restructuring will turn fuel into a handy scapegoat. It’s a lot easier to tell a politician that your airline will no longer fly to a regional airport due to the impact of the US-Iran war than because your business plan simply failed.
I have some sympathy for the airline industry. After all, the jet fuel market is prone to disruption. Because of its chemistry, aviation fuel is more difficult to store than, say, gasoline. And because of how it’s sold - in planeloads at airports rather than in car-sized glugs outside thousands of service stations - the industry typically uses a just-in-time model. Airports keep little fuel in storage, instead relying on direct pipeline connections to refineries and import terminals. When trouble hits, those logistics magnify the impact.
Thankfully, the jet fuel market is small, accounting for less than 7.5 per cent of total global oil demand, so relatively minor changes in refining output and airline consumption can shift the supply and demand balance. To put this into perspective, gasoline accounts for 26.5 per cent of global oil consumption, and diesel for about 28 per cent, thus requiring larger shifts to rebalance.
INCREASING JET FUEL YIELDS
The problem is that the 7.8-million-barrel-a-day global jet fuel market relies heavily on export-oriented refineries located in the Persian Gulf. Kuwaiti, Emirati and Saudi plants exported, on a net basis, about 400,000 barrels of aviation fuel per day last year. The closure of the Strait of Hormuz has not only interrupted that flow, hitting Europe particularly hard, but also reduced the availability of crude, hampering refining operations.
Still, nothing like record jet fuel refining margins to put every plant into what the industry calls “max” mode. Of course, “max” is relative; refineries can tweak their operations here and there, but typically they cannot boost jet fuel output by more than a couple percentage points before they hit engineering limits.
But that may be enough. Take the US: Before the war, jet fuel accounted for 10.5 per cent of the country’s refinery output. The yield has now climbed to a record high of 12.7 per cent. In volumetric terms, that means US refiners are churning out 250,000 more barrels per day than they were a year ago.
“We believe jet fuel is well on its way to being rebalanced,” says Vikas Dwivedi, a Houston-based oil analyst at Macquarie Bank, a large commodity player.
The extra jet fuel comes at the expense of other refined products, of course. So solving the aviation fuel problem may create a diesel, or even a gasoline, difficulty. Still, if half of the world’s refining industry manages to increase jet fuel yields as much as American plants already have, the additional output would more than offset the losses from the Middle East.
THE ULTIMATE SOLUTION
For now, it’s touch-and-go, however. Europe is desperate for fresh supply, and while new tankers arrive, it’s draining its small stockpile. Aviation-fuel stocks in the key oil hub of Amsterdam-Rotterdam-Antwerp have fallen to a six-year low. In the meantime, European authorities have relaxed aviation fuel rules, allowing the sale of the American-made variety.
In April, Europe replaced about 70 per cent of the aviation fuel it previously bought from the Middle East with extra supply from the US and Nigeria, where a new refinery is churning record amounts of the fuel. Ideally, it should increase that to 80 per cent to 90 per cent by June to avoid supply problems, according to the International Energy Agency. Europe may need to tap its strategic reserves of refined products to cover any remaining gaps.
Demand has also fallen. In part, the drop reflects the impact of the war on the Middle East itself, where hub airports like Dubai and Doha had been badly affected. It also reflects the fact that high prices have prompted airlines to cancel uneconomical routes. Seasonally, the number of commercial flights is now running about 0.5 per cent below last year. Pre-war, flight numbers were up 2 per cent year-on-year, according to data from FlightRadar24.
If all goes well, the global refining industry can solve the jet fuel problem, particularly if demand comes down a bit in response to higher ticket prices. But all rarely goes well when it comes to cracking oil under high temperature and pressures. Fires, outages and other setbacks can quickly reduce supply. The ultimate solution is reopening Hormuz.
Until then, I will watch the market with apprehension, fearing a barrage of WhatsApp messages if any friend or relative gets stranded in airport. Fortunately, it seems everyone I know is going away in either July or August. I would be more worried about flights into September and beyond.
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