For most of the past two years, with planes grounded around the world, jet fuel has been the most unwanted product an oil refinery can produce. But as the Western world rediscovers air travel, it is quickly becoming one of the most popular commodities.
The turnaround has been remarkable. At the start of the viral outbreak in April 2020, a gallon of jet fuel sold for just 27 cents in the physical New York Harbor market. Fast forward two years, and prices have become lopsided. Last week, jet fuel briefly changed hands in New York for the exorbitant price of $7.61 a gallon, or more than $320 a barrel.
Soaring prices in New York reflect local idiosyncrasies. Just a few miles away in New Jersey, prices were much lower, for example. But it remains an indicator of how tight the North American and European jet fuel markets are as millions head into airports this week for the Easter holiday.
Soaring prices add to global transportation inflation and potentially create more headaches for supply chains that rely on air freight to move goods. With inventories at extremely low levels in the United States, for some companies the key may be securing supplies, rather than the price they have to pay.
In some ways, today’s jet fuel market is a cut-and-paste version of what happened to gasoline in 2021. Motorists returning to the roads in droves last year increased gas mileage, driving up wholesale prices by around 70% compared to January. until August. This year, air travelers are returning. The International Energy Agency predicts that global jet fuel demand will jump 15.9% in 2022, the largest year-on-year increase of any fuel, while still leaving it below levels of 2019.
Soaring consumption has reduced U.S. jet fuel inventories to the lowest for this time of year since 2005, government data shows. The situation is worse on the East Coast, home to key airport hubs such as Hartsfield – Jackson Atlanta International and Charlotte Douglas International, where stocks have plunged to a 25-year seasonal low. While China’s new lockdown acts as a drag for now, jet fuel supply is expected to remain constrained for months. “Airlines are adding a lot of capacity, and some airlines are already exceeding their pre-pandemic levels,” Eamonn Brennan, chief executive of airspace manager Eurocontrol, said last week. “People show that they really want to fly.” US airports are now the busiest since the pandemic began. On average, around 2.1 million people a day passed through airport security checks in the past 30 days, according to official data, down 11% from pre-Covid levels. A year ago, passenger numbers stood at just under 1.4million, down 41% from pre-lockdown flows.
In Europe, Heathrow airport in London is also showing a resurgence in activity. In March, around 4.2 million people traveled through its terminals, the most since the start of the pandemic and double the average during the July-September summer vacation period last year. But demand alone does not explain the tightening. Supply is also an issue. Jet propellant belongs to a larger set of fuels called middle distillates, which also include diesel and fuel oil. Diesel demand soars as Europe and US shun Russian supplies, so European and US refiners focus on producing as much diesel as they can, at the expense of jet fuel . For much of the pandemic, this was not an issue as aviation demand was in the doldrums. In fact, refiners solved part of the diesel shortage by diverting molecules that would otherwise end up fueling planes in the diesel pool. But with the rapid increase in the number of air passengers and the increase in airline capacity, this is now a problem.
In the United States, 8.6% of refinery output has been dedicated to aviation fuel over the past four weeks, well below the pre-Covid output of 10.2%. By contrast, they maxed out diesel, with refinery output up 30.7% over the past four weeks, compared to a pre-pandemic average of 29.7%. Price signals could begin to convince refiners to switch back to jet fuel. But it will cut diesel supply at the worst possible time. It’s the oil refinery version of whac-a-mole.
Central bankers had hoped supply chain problems would soon disappear. The turmoil in the jet fuel market shows that as more and more sectors of the economy return to something closer to normal, new inflationary pressures will emerge.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He was previously the Commodities Editor at the Financial Times and is the co-author of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.”
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