(This August 14 story has been corrected to correct the spelling of the analyst’s name in paragraph 15)
By Seher Dareen and Shariq Khan
NEW YORK (Reuters) – Global jet fuel demand is poised to weaken as a slowdown in consumer spending impacts travel budgets, a shift that could weigh on oil prices in coming months.
Global oil demand has fallen short of expectations in the first half of 2024 due to weaker-than-expected consumption in the US and China, the two largest oil markets.
Jet fuel represents about 7% of global oil demand and was widely expected to be a mainstay of growth this year as travel continued to recover from the pandemic.
Global demand for jet fuel this year through July averaged about 7.49 million barrels per day (bpd), up nearly 500,000 bpd from the same period last year, according to data from Goldman Sachs.
Demand will need to rise faster in the coming months to meet the bank’s growth forecast of 600,000 barrels per day for the year. That seems less likely, as Goldman Sachs estimates demand growth from August through October is only about 400,000 barrels per day.
Major U.S. airlines and travel companies expressed concerns in recent days that consumer spending is slowing as disposable incomes have shrunk, which should weigh on leisure travel.
U.S. consumer spending growth averaged just 0.3% in the three months through June, the slowest increase in more than a year.
“We see limited room for further gains for (US) jet fuel, traditionally the most macro-driven product category, as a cooling economy weighs on air travel demand,” the International Energy Agency (IEA) said on Tuesday.
U.S. jet fuel demand fell sharply from a post-pandemic high of 1.95 million barrels per day in the week ending Aug. 2 to just 1.6 million barrels per day last week, the EIA reported Wednesday.
Weaker economic activity could also worsen a slowdown in global trade, reducing demand for air freight, Bank of America analysts said. They noted that global trade has experienced a slowdown in recent years as demand in the US and Europe has shifted from goods to services.
This week, the Organization of the Petroleum Exporting Countries cut its 2024 oil demand forecast for the first time since it was published in July 2023, while the IEA cut its 2025 estimate. Both cited weaker-than-expected economic growth in China and elsewhere as the reason for the credit rating downgrade.
A global technical glitch that grounded dozens of flights for a few days in July has also impacted jet fuel demand. This was likely why U.S. jet fuel consumption fell by about 10,000 barrels per day in July, the IEA said.
“In short, macro conditions for transportation fuels are deteriorating quite rapidly,” Bank of America analysts said. “With this backdrop in mind, we believe that broader jet fuel demand trends remain weak,” they said.
PROLONGED HIT
Some longer-term factors, such as changes in consumer behavior and improved technology, also impact consumption.
Improved efficiency and mileage in newer planes means airlines are carrying more passengers over longer distances while using less fuel, said Rystad analyst Wei Ren Gan.
Average fuel economy for U.S. commercial airlines rose from 64.9 in 2019 to 65.5 seat miles per gallon in 2023. Seat miles is an airline industry term used to measure airline capacity.
A post-pandemic shift in consumer preferences for shorter domestic flights over international destinations has also hurt demand, Bank of America analysts said.
Meanwhile, years of trade wars between the US and China have reduced air traffic between the countries to a quarter of what it was five years ago, Goldman Sachs analysts said.
International travel from Russia has fallen 40% from 2019 levels as many borders have been closed to Russian passengers since Moscow’s invasion of Ukraine in 2022, she added.
If these two routes had grown at the same rate as other global air travel, jet fuel demand would have been about 80,000 barrels per day higher, the analysts said.
They expect demand for jet fuel to continue to grow, but said the slowdown due to these issues and the improvement in mileage could result in an adjustment to their oil demand forecasts and price forecasts for the year.
