Analysis: China’s latest rules for foreign carriers to lend limited support to jet fuel demand
China’s move this week to ease the flight restrictions on foreign airlines, and having increased the frequency of its domestic flights in the past few weeks after it lifted the curbs put in place to halt the spread of the coronavirus, is likely to lend limited support to jet fuel demand and prices as the path to recovery is still fraught with many uncertainties, industry sources said.
“On a positive note, domestic flights are gradually taking off and that is going to provide a cushion for jet fuel prices,” a Singapore-based trading source said on June 5. However, the Civil Aviation Administration of China’s announcement for foreign airlines has limited appeal, he said.
On June 4, the CAAC announced that foreign carriers will be allowed to operate one flight per week to a single city on a list of approved destinations until October 24. Airlines will be able to increase the number of flights to two per week, as long as no arriving passengers test positive for COVID-19 for three consecutive weeks.
However, an international flight run by an airline will be required to suspend services for one week if five or more confirmed COVID-19 cases are found on the flight and for four weeks if ten or more confirmed COVID-19 cases are found, according to CAAC’s announcement.
Domestic travel to propel demand
China’s jet fuel demand for its domestic flights has started to recover as activity in various economic sectors resume and restrictions on internal travel relaxed.
Travel industry data and analytics company, Cirium showed that the average number of domestic flights in China totaled 7,734 per day in May, accounting for about 78% of the pre-COVID-19 level. This compares with an average of 3,162 domestic flights per day in February, the data showed.
April was bearish for jet fuel output as the country’s production plunged 42.9% year on year to a six-year low of 2.42 million mt, data from the National Bureau of Statistics showed. However, exports hit a record high of 1.43 million mt in April, General Administration of Customs data showed, suggesting that stocks had tightened as demand for domestic flights registered an uptick.
“We will keep all the jet fuel barrels for domestic sales in June, including 10,000 mt of jet fuel for bonded sales in Shanghai Pudong International Airport,” a refinery source in Shanghai said.
He added the refinery will sell 50,000 mt of jet fuel to domestic airports this month, a significant jump from May, as demand accelerates.
CAAC’s prevailing restrictions on international flights will keep a lid on China’s jet fuel demand, industry sources said.
Jet fuel consumption for long-distance flights to countries where COVID-19 continues to spread and risks remain high, such as the US, would be low, given CAAC’s restrictions, a Beijing-based analyst said.
July and August are summer holiday months in China when families take trips overseas. But currently, even the prospect of heightened travel during China’s upcoming ‘Golden Week’, which starts October 1 remains dim, sources said.
“Right now, people are expecting a slow recovery for demand. I won’t be surprised if [global] jet fuel makes a full recovery only by 2026 … jet fuel margin is still looking pretty bad at the moment and refiners will surely react proactively to this by reducing jet output, or even cutting run rates as a whole,” the Singapore-based source added.
Reflecting this, the FOB Singapore jet fuel margin against front month cash Dubai remained in negative territory and was assessed at minus 7 cents/b at the 0830 GMT Asian close on June 4, down $14.67/b since the beginning of the year, when it was assessed at plus $14.62/b, S&P Global Platts data showed.
Meanwhile, S&P Global Platts Analytics on June 4 said that global jet fuel demand is forecast to recover in the second half of 2020, but this will lag the recovery for other products. Platts Analytics forecasts a 24.7% year-on-year decline in global jet fuel demand in 2020.
“Led by China, Asia Pacific demand will see a slightly gentler decline in 2020, but 2021 demand will remain below 2019 levels,” it said.