Jet Fuel: Smoother Landing For Prices Expected

The prices of jet fuel are expected to trend downwards, alongside an expected softening of crude oil prices in the next five years. Nonetheless, this decline will be tempered by a better outlook for both air transport and shipping with economic recovery in the US and Europe, though a more cloudy outlook for Asia underpins our projections for prices in Singapore to experience a faster rate of decline than in Rotterdam and New York.

Better Outlook Tames Price Fall

Jet fuel is trending downwards alongside the fortune of crude oil prices. However, a pick-up in air traffic activity - seen in recent months - will likely see a smaller decline in jet fuel prices vis-à-vis bunker fuel in 2014. IATA continues its optimism regarding air transport growth. It noted a 'strong start' to 2014 for both air freight markets and passenger demand, a trend the IATA is optimistic will continue throughout the year on the back of economic recovery, especially in Europe and the US.

A Flying Start To The Year
Air Freight Y-o-Y Growth In First Two Months Of 2014 (%)

The prices of jet fuel are expected to trend downwards, alongside an expected softening of crude oil prices in the next five years. Nonetheless, this decline will be tempered by a better outlook for both air transport and shipping with economic recovery in the US and Europe, though a more cloudy outlook for Asia underpins our projections for prices in Singapore to experience a faster rate of decline than in Rotterdam and New York.

BMI Crude Oil & Jet Fuel Price Forecast, USD/bbl
2012 2013 2014f 2015f 2016f 2017f 2018f
Crude Oil
Brent 111.70 108.79 104.96 102.00 101.00 99.00 98.00
WTI 93.30 98.01 99.04 101.00 96.00 94.00 95.00
Dubai 108.88 105.36 101.84 100.50 98.50 96.50 95.50
Jet Fuel
Rotterdam 131.41 127.30 126.58 125.78 124.78 122.78 121.78
New York 130.74 125.10 126.46 125.67 123.14 121.96 120.16
Singapore 126.90 122.65 120.37 118.47 116.12 113.59 112.07
f=forecast. Source: Bloomberg, BMI

Better Outlook Tames Price Fall

Jet fuel is trending downwards alongside the fortune of crude oil prices. However, a pick-up in air traffic activity - seen in recent months - will likely see a smaller decline in jet fuel prices vis-à-vis bunker fuel in 2014. IATA continues its optimism regarding air transport growth. It noted a 'strong start' to 2014 for both air freight markets and passenger demand, a trend the IATA is optimistic will continue throughout the year on the back of economic recovery, especially in Europe and the US.

For freight in particular, IATA's chief executive Tony Tyler notes that 3.6% year-on-year (y-o-y) growth in air freight for the first two months of 2014 is a 'significant step up' from the 1.4% y-o-y increase seen over the whole of 2013. During this period, activity in the Middle East continued to see the greatest growth - coming in at 11.9% y-o-y in February 2014 -, thanks to new hubs in the Gulf that have increased capacity. Europe's economic recovery has also helped the region average a 5.7% y-o-y growth for January and February 2014.

A Flying Start To The Year
Air Freight Y-o-Y Growth In First Two Months Of 2014 (%)

IATA also expects strong demand for passenger air travel. Passenger traffic for February 2014 - the most recently available data - saw a 5.4% y-o-y growth, marking year-to-date growth of 6.9%. Full year passenger traffic growth in 2013 was 5.2%. As in the case of air freight, the Middle East saw the strongest growth of about 15.8% in the first two months of 2014. However, we note that Europe's 6.1% and Asia-Pacific's 6.0% over the same period is the more notable, as they account for 23.9% and 33.7% of total passenger market share as of February 2014.

Growth Preparing To Jet Off
Passenger Demand Y-o-Y Growth In The First Two Months Of 2014 (%)
Total Air Freight And Passenger Volume Growth
RPK (Feb)
(% chg y-o-y)
FTK (Feb)
(% chg y-o-y)
YTD RPK
(% chg y-o-y)
YTD FTK
(% chg y-o-y)
International 5.5 2.8 6.9 4.0
Domestic 5.3 3.6 6.8 1.6
Total Market 5.4 2.9 6.9 3.6
RPK: Revenue-Passenger-Kilometres; FTK: Freight-Tonne-Kilometres; YTD: Year-to-date. Source: IATA

With our expectations that the global economy is set on a road of firmer recovery in 2014, this will continue to support the air freight and passenger industry, thereby supporting jet fuel demand ( see 'Developed States To Lead Global Recovery In 2014', December 2013). The EU's decision to scrap jet fuel import duties from January 1 2014 could see softer prices in the Rotterdam market. The downward trend in crude prices will also add to the softening of jet fuel prices. However, the extent of this decrease will be capped by continued recovery in the air freight and passenger sector driving fuel demand.

Softer Prices But Capped By Expected Industry Growth
Jet Fuel Prices (USD/bbl)

2014 opened with lower European prices, but since the start of April 2014 prices at Rotterdam have seen a stronger uptick than in New York or Singapore. The strong growth recorded in Europe for both the cargo and passenger segments is significant given Europe is the world's second largest market for both air freight and passenger travel.

European Growth A Significant Boost
Distribution Of Air Freight (LHC) & Passenger Travel (RHC) Market By Region

The trend underpins our forecast for just a 1% y-o-y fall in jet fuel prices for 2014 in Rotterdam. The subsequent fall in prices seen from 2015 to 2018 is an outcome of our expectations for crude prices (with the exception of WTI) to fall, but we highlight our expectations for the rate of jet fuel price decline to be slower than in crude prices. In New York, moderate but healthy growth in both freight and passenger travel will also provide some support for prices. In addition, trade links across the Atlantic will also see New York trend closer towards Rotterdam.

Of greater concern is the price of jet fuel in Singapore. While passenger demand growth remains robust, the freight picture in Asia is more worrying as the region experienced only a 0.1% increase in air freight demand in February 2014. While this was in part a result of the Lunar New Year holidays taking place especially in much of east Asia during the month, freight demand prior to the holidays - where stockpiling was to be expected - only grew 3.8% y-o-y, a little below the global average in January 2014.

We note that economic growth slowdown in China - which could hit other Asian countries that together make up the supply chain of Asia Inc. - will affect air freight demand. While Europe's recovery could help support China's export industries, growing credit problems within China could limit the extent to which European demand will re-fuel Chinese growth. Therefore, we have a more moderate view on jet fuel prices in Singapore, projecting that it will have a faster rate of decline over our forecast period than prices in Rotterdam or New York.

Faster Fall In Singapore
BMI's Jet Fuel Price Forecast (USD)

Risks To Outlook

The risks to our outlook are mainly to the upside:

  • Crude oil prices: Given that our fuel price forecast is largely based on crude oil price expectations, fluctuations to crude oil prices will have a significant impact on our projections.

  • European recovery: If this has a stronger-than-expected impact on the Chinese economy, it will strengthen air cargo demand within the Asia-Pacific region and better support prices in Singapore.

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Sector: Oil & Gas, Freight Transport
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