Demand for jet fuel may take years to recover from the impact of the Covid-19 pandemic and is expected to lag behind an oil price increase due to weak air travel demand, especially in the absence of a vaccine.
A measured rebound is expected in the third quarter of next year before a full recovery in demand by 2023, Bank of America's Global Research team said in commodities report on July 23.
The Organisation for Economic Co-operation and Development countries and China are expected to drive most of the growth, but the recovery will probably be L-shaped as quarantine requirements and fresh outbreaks in some cities limit air travel.
An L-shaped recovery is a sluggish rebound that follows a deep recession and is characterised by persistent unemployment and stagnant economic growth.
While refiners have sharply reduced their output, stocks of middle distillates and jet fuel remain “very high” in most locations, BofA said.
“The only way out of this for jet [fuel] seems [to be] a cure or a vaccine for Covid-19,” BofA's analysts said.
“Yet creating 6 billion vaccines for 7.8bn people in the world could take several years. And even if most of the jet fuel demand recovery comes from the OECD and China going forward, it could still take 12 to 18 months to vaccinate 2bn people.”
The outbreak forced airlines to ground their planes as countries to shut their borders, leading to a plunge in demand for jet fuel.
Freight and domestic passenger operations have begun to pick up. However, recent trends suggest that flights between or within developed and emerging economies will probably be restricted until the end of the year.
“The recovery in air travel is at best frail as the US continues to post record Covid-19 transmission rates and Spain has led the pick-up in new ... infections in Europe in the past two weeks,” BofA said.
The demand recovery path for US jet fuel is L-shaped despite an improvement in July, which may not last given the recent growth in infection rates.
Meanwhile, jet fuel exports out of the US Gulf Coast to Latin America, Canada and Europe declined after flights were grounded due to the rapid spread of the virus in Brazil, Mexico and other countries in the Americas.
Petroleum products worldwide have recovered a lot faster, the report said. Crude oil runs across the US and other regions have increased but jet fuel production remains depressed relative to other products and historical norms, BofA said.
For example, US crude runs, which averaged 17 million barrels per day in January, increased from 12.3 million bpd in May to 14.2 million bpd this month.
During the same period, jet fuel production collapsed from a high of 1.9 million bpd to 500,000 bpd. Production is now back at 800,000 bpd.
With refining margins at their lowest levels, jet fuel refiners have sharply revised their output downwards.
“We believe jet fuel, specifically, and middle distillates, more broadly, will lag the recovery in oil prices,” the report said.
The world’s demand for oil is expected to recover to 97.4 million bpd next year.
However, this will still be 2.6 million bpd below 2019 levels, with declines in jet fuel and kerosene demand accounting for three quarters of the deficit, according to the International Energy Agency.