Chinese Travel Boom Drives Up Jet Fuel Prices, Airlines Prepare for Impact
The Chinese travel industry is experiencing a booming resurgence after years of pent-up demand due to the Covid-19 pandemic. Millions of Chinese passengers are now returning to the skies, leading an aviation boom across Asia. This resurgence is expected to be the final missing piece in the global air travel recovery, as domestic travel has already fueled the rebound in Asia’s top aviation market. Now, with the lifting of a ban on group tours to popular destinations, international travel is set to take off as well.
However, this travel boom comes with a drawback: it is likely to lead to a surge in jet fuel consumption and potentially drive up prices. In recent months, the availability of aviation fuel has decreased, with stockpiles at major hubs such as Singapore and Amsterdam-Rotterdam-Antwerp falling below seasonal averages. This can be attributed to a series of unplanned refinery outages and increased diesel production at the expense of jet fuel.
While current aviation fuel prices are still far from the highs of last year, they have risen about 30% this month compared to the beginning of July. According to Bloomberg Fair Value data, prices are now trading above $116 a barrel in Singapore. The increase in jet fuel prices may put a strain on airlines that are currently enjoying significant profits, and travelers may end up facing higher fares if companies pass on these increased costs.
Global oil prices have also been on the rise, increasing more than 15% in the past two months due to OPEC output curbs and higher run rates by refiners seeking to capitalize on favorable fuel-making profits. Banks like UBS have adjusted their oil price forecasts upward, highlighting a market deficit.
China’s recovery has been a crucial factor in the outlook for oil and the global economy. Despite overall weaker growth in the nation, various data on flight bookings indicate a positive trend. Chinese weekly flights have surged 13% above pre-Covid levels as of the week ending August 20, according to travel platform Flight Master.
Moreover, international travel is showing strong signs of recovery as well. Bookings for overseas group tours during the National Day Holiday in October have more than tripled since China eased restrictions. According to online travel agency Trip.com Group, searches for overseas flights in early August already exceeded the same period in 2019. Flights between the US and China are expected to double from current levels by the end of October.
However, the complete recovery of Chinese international tourism will not happen overnight. After enduring four years of strict Covid restrictions, potential travelers are facing high costs, a weakening yuan, a sluggish economy, and difficulties in obtaining travel documents such as visas.
The growing demand for travel in China coincides with stretched fuel supplies, making markets more susceptible to price shocks for diesel and jet fuel. Energy Aspects predicts that China’s jet fuel demand will accelerate from August and could reach pre-Covid levels by the fourth quarter.
On a global scale, while demand is projected to increase by an average of 200,000 barrels a day in the latter half of the year compared to the first six months, a return to pre-pandemic levels is not expected until as early as mid-2024. Oil markets are currently pricing in a scarcity of middle-distillate fuels like diesel and jet fuel. Inventories at crucial oil hubs have been depleted due to recent outages and capacity shutdowns within the global refinery system.
Looking ahead, there is more refinery maintenance work scheduled in North America and Europe during September and October, potentially further reducing fuel supplies. According to Mukesh Sahdev, head of oil trading and downstream solutions at Rystad Energy, the supply risk for oil products is strong at the moment. He anticipates that jet fuel prices could peak in September, putting pressure on airlines that are still recovering from the pandemic.
Tim Bacchus, senior aviation analyst at Bloomberg Intelligence, suggests that rising fuel costs may prompt airlines to pass on some of the expenses to customers by increasing or introducing fuel surcharges. This, in turn, could potentially dampen travel demand, especially in Asia where consumers are already paying higher ticket prices.
The Chinese travel boom is undoubtedly a positive sign for the industry’s recovery, but it also poses challenges in terms of fuel supply and prices. As airlines brace for the impact of rising jet fuel costs, travelers may need to prepare for the possibility of higher fares in the future.
