BAKU, Azerbaijan, Dec.3
By Leman Zeynalova – Trend:
Key drivers for jet fuel prices will remain the fluctuations in the price of oil as well as the expectations for weak macroeconomic conditions hitting air freight demand, Trend reports citing Fitch Solutions Macro Research (a unit of Fitch Group).
“Our lower crude oil price expectations for the next two years have prompted a reduction in the jet fuel forecasts. We now see jet fuel prices dropping to an annual average of $75 per barrel in 2020. The somewhat languid performance for global Brent crude prices through 2019 has seen jet fuel prices stagnate through the year to date, with prices hovering around $77 per barrel. For Brent, which remains the most important price driver for jet fuel, across 2019, supply and demand have pulled prices in opposite directions,” said the company in its report.
Fitch Solutions says supply has contracted y-o-y, dragged lower by the cutbacks made by OPEC and Russia, sanctions in place on Venezuela and Iran and pipeline bottlenecks and spending pullbacks in the US shale patch.
“Demand, meanwhile, has fallen off a cliff, driven down by weakening global trade and economic activity and a host of more localized headwinds to growth. Shifts in the term structure of Brent futures, the strength in physical markets relative to paper ones and drawdowns in global crude inventories would all suggest that the market has tightened. This, though, has proved insufficient to pull Brent sustainably back into the $60-70 per barrel range. Ultimately, sentiment has trumped fundamentals, with US-China trade tensions casting a long shadow over the market,” reads the report.
“For 2020, the main takeaway is that from the bottom up, conditions seem more supportive of demand and this is reflected in our forecasts. However, the view from the top down is less clear cut. On the one hand, our global headline GDP growth forecast suggests a relatively benign economic environment next year.”
Increasing fiscal and monetary stimulus measures should prove supportive, while low base effects from 2019 will flatter growth rates in a number of markets, according to Fitch Solutions.
“But the risks to this forecast are skewed heavily to the downside. Our economists have recently made a number of downward forecast revisions to key markets, including China and the US, and have flagged the potential for further revisions over the coming quarters.
Significantly, most of the damage is being done by weakness in global trade and manufacturing activity and these are the areas of the economy that are most impactful on demand for oil and therefore for jet fuel.”
These macroeconomic headwinds moderating the company’s growth outlook will impact the demand for jet fuel and also have a particular impact on demand for jet fuel from the air freight sector.
“A slowdown in the levels of air cargo and freight has been visible through the YTD, driven by the deteriorating global trade environment. Air freight’s share of world trade is always very cyclical. Whenever there is an economic downturn, shippers reduce their exposure to more expensive air freight in favour of slower and cheaper options,” reads the report.
For passenger demand, the growth in passenger volumes has remained fairly robust through 2019. However, 2019 growth year-on-year is trending lower, according to the estimations of Fitch Solutions.
“Our expectations for further weakness in global economic conditions through 2020 will continue to weigh on air travel demand, particularly if business and leisure travel demand starts to become affected by headwinds to household incomes and employment and as stimulus to demand from lower airfares – a result of lower wholes ale costs for airlines - fades.”
Air traffic has historically been largely correlated with economic growth and the company maintains that the global airline industry will continue seeing strong demand over our forecast period, supported by a growing population, growing middle classes with the spending power to afford air travel, as well as positive growth in the global economy.
“However, our expectations for several years of moderated economic growth before a slow recovery from 2023, will slow the rate of demand growth and subsequently continue to weigh on jet fuel prices. Regionally, we expect Asia-Pacific to continue to lead growth rates globally, with the expansion of regional air routes broadening consumer choice for air travel.”
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