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Jet fuel demand soars, but some clouds on the horizon

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A combination of low oil prices, a rapidly expanding middle class in Asia and booming freight markets driven by expanding world trade and e-commerce are fuelling increased demand for jet fuel worldwide. However, future demand runs the risk of being hampered by a greater penetration of sustainable aviation fuels (SAFs) and efficiency gains, according to a new report from IHS Markit.

Global jet fuel demand will rise from around 8% of total refined product demand in 2017 to more than 10% by 2040, according to the analysis. The global market for jet fuel will reach more than 9.5mn b/d by 2040, compared with demand of nearly 7.45mn b/d in 2018.

‘Thanks largely to low oil prices and strong growth in air travel, particularly in Asia, jet fuel is a fast-growing product, with global jet-fuel demand growth comfortably exceeding 4% in the last two years,’ says Louise Vertz, Director, Refining and Marketing Research at IHS Markit and lead author of the study. ‘In a refined-fuel market that has had sluggish annual growth of just shy of 1.5% overall, that is a bright spot for refiners, and is one of the few refined products we expect to see gain consistent demand growth through 2040. However, there are some potential challenges that could inhibit that demand growth, particularly increased market penetration of sustainable aviation fuels and increased fleet efficiency.’

Air travel growth is set to continue its strong performance. The International Air Transport Association’s (IATA) mid-year economic report for passenger traffic – measured in revenue passenger kilometres (RPK), is expected to grow by 7% in 2018, after increases of 7.4% and 8.1% in 2016 and 2017, respectively. Freight, which is measured in freight tonne kilometres (FTK) is expected to grow 4% in 2018, down from 9.7% in 2017, which, was more than double the 3.6% performance seen in 2016, and the strongest year since the rebound from the global financial crisis.

It is little surprise then that jet fuel has outperformed most other oil products in registering annual growth of more than 4% in 2016 and 2017, and will continue to perform well, with average annual growth projected at more than 2% to 2025, IHS Markit says.

Although low oil prices have contributed greatly to recent growth in air transportation, price is only part of the picture. ‘With lower fuel costs, airlines have lowered ticket prices, which has certainly contributed to the strong performance, and jet fuel has a high degree of price elasticity,’ notes Sandeep Sayal, Vice President of Refining and Markets Research at IHS and a co-author of the report. ‘One of the biggest factors in jet-fuel demand, on a global level, has to do with increased wealth in the form of rapid expansion of the middle class, particularly in Asia. This has had a major impact on air travel, and we expect this trend to continue, particularly in emerging markets, as about 160 million people are expected to join the middle class each year to 2025.’

Market shares
OECD markets currently hold 58% of the jet-fuel market. By 2040, IHS Markit expects OECD markets to account for about 48% of world jet-fuel demand as non-OECD markets, driven by growth in Asia, begin to overtake OECD markets in the mid-2030s. China, India and Indonesia are all rapidly growing aviation markets, and both Thailand and Japan are boosting capacity.

The Middle East is the next biggest contributor to jet-fuel demand growth, with approximately 340,000 b/d growth to 2040, gaining a 2% market share to reach 9% of global jet demand. IATA forecasts a doubling of passenger traffic in the region during the next 10 years and, to this end, a host of new airport construction projects are underway, and Gulf carriers have been expanding aggressively.

‘Despite growth in passenger traffic, growth in Middle Eastern jet-fuel markets will not be as strong as expected, as efficiency gains are expected to work through the fleet to a greater degree than in most other regions,’ according to Sayal. ‘Overall, Middle East jet-fuel demand is nevertheless the fastest growing, with an annual rate of 2.2%, growing by 40% by 2040, versus the current 530,000 b/d demand in 2018.’

Efficiency gains
Efficiency is a critical market driver, as the Carbon Offsetting and Reduction Scheme for international Aviation (CORSIA) gets underway in 2021. (CORSIA is a UN climate initiative and market-based measure designed to reduce emissions from the international air transportation sector.) ‘From the mid-2020s, efficiency gains can be expected to accelerate,’ Vertz says.

While efficiency gains have averaged slightly more than 1%/y on a fuel per passenger-km basis, the advent of newer, fuel-efficient aircraft could hasten efficiency gains, and take-up of these more efficient models is likely to accelerate in a higher oil price environment, according to the study.

Other contributors to growth include deregulation of the airline industry, which drove greater accessibility, as well as price competition, which has been boosted by internet search capabilities that provide price transparency. Greater use of regional airports by the low-cost carriers has also resulted in expansion of smaller exports, forcing legacy operators to adapt.’

One example of this growth is in Europe. Southern Europe has registered jet-fuel gains of more than 90,000 b/d uring the last five years compared to growth of 50,000 barrels of jet fuel in Northern Europe, according to IHS Markit. Furthermore, European countries are investing strongly in airport expansion capex, including the UK, Germany and Turkey. Backed by this expanded capacity, IHS Markit expects European jet fuel demand growth rates will be sustained, albeit at more moderate rates than the current highs, averaging nearly 1.5% annually during the next 10 years, then 0.6% to 2040. Localised congestion and capacity constraints, as well as alternative transportation modes, however, will temper prospects in some regions.

Africa currently runs second to the Middle East in terms of jet-fuel demand growth rates, despite a modest 200,000 b/d contribution to overall growth in 2040. While IHS Markit projects a cautiously optimistic annual growth rate of just above 2% to 2040, the region currently underperforms in terms of air traffic demand, but some markets could double during the next decade, assuming infrastructure funding is secured.

With average annual growth rates of less than 1.5% each, CIS and Latin America are expected to register a lacklustre performance through 2040, mainly due to a lack of construction projects, a lower level of market access, and uncertain tourism and freight development.

‘With a strong demand outlook, refiners will be looking to ensure high jet-fuel yields to meet demand, and supply will be boosted, but not necessarily in the regions that have the most growth, which means regional supply imbalances will worsen to 2040,’ says Sayal.

Sustainable aviation fuels (SAF) are low-carbon fuels, mainly biojet, which are produced from sustainable oil crops. Biojet can be blended with conventional jet fuel to reduce the carbon footprint or air travel by as much as 80%. However, adoption of these fuels remains limited, in part by the prohibitive production costs, which is nearly double that of conventional jet fuel, comments IHS Markit. ‘Without changes in policy support and stronger market incentives, infrastructure, investors are hesitant to invest in these SAFs,’ it says. ‘This may change, however, as worldwide efforts to reduce carbon dioxide (CO
2) emissions gather pace and CORSIA goes into effect. With this in mind, SAFs are expected to play a greater role in the fuel mix toward the end of the forecast period.’

Finally, substitution for traditional jet fuel demand may eventually come from electricity and electric planes, although IHS Markit does not expect market penetration to begin until at least 2040, and then initially only for short-hall commuter trips.

Higher oil prices also could dampen the growth outlook for jet fuel.

Photo: Shutterstock

News Item details


Journal title: Petroleum Review

Keywords: Energy

Subjects: Refining, Electric vehicles, Aviation fuel, Carbon emissions, Sustainable energy, Carbon taxation

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