.
Strong domestic production will largely shield U.S. carriers from supply worries, even while they continue to be exposed to higher jet fuel prices, especially on the West Coast.
Globally, jet fuel prices were 80.9% higher on average during the week ending May 8 than they were a year earlier, according to energy data provider Platts. Iran's effective closure of the Strait of Hormuz, through which approximately 20% of the world's oil supply is normally transported, has sent prices soaring.
Meanwhile, jet fuel stockpiles in late April were already at their lowest in five years at the Amsterdam-Rotterdam-Antwerp hub, the primary location for European oil refining and storage, according to an analysis by financial services group Societe Generale
To guard against a shortage, European airlines made a run on jet fuel in April, purchasing 17% more than required for operations, according to jet fuel management software company i6 Group. That compares to a buffer of 6% a year earlier.
In Asia, the picture is complicated. Reliance on Middle East crude is compounded in some countries with reliance on refining from China, India, South Korea and others. But China and South Korea have already restricted jet fuel exports to protect their own supply, leading to rationing in the Philippines, Sri Lanka and elsewhere.
Other Asian countries and Australia would be vulnerable if India decides to take similar measures, said Michael Tamvakis, professor of commodity economics and finance at City St George's, University of London.
It's far from clear that fuel constraints will cause summer chaos. Airlines are already paring schedules to deal with higher fuel prices and canceling flights weeks or months ahead of time.
In May, approximately 13,000 flights have been canceled globally, representing 1.5% of global capacity, said Pawan Jain, senior energy and sustainability analyst at procurement and intelligence firm Beroe.
Dave Ruisard, U.S. products senior editor for commodity price benchmark provider Argus, said he expects natural forces of supply and demand to prevent widespread jet fuel shortages, even if the Strait of Hormuz remains closed into the summer.
In the U.S., for example, the spike in jet fuel played a major role in driving up April fares 20% year over year.
"The cost to the airlines is going to be a lot higher, which means less people will be able or willing to pay to fly," Ruisard said. "I think the demand for jet fuel will tail off as supply tails off."
But Tamvakis foresees bigger problems, especially in Europe, if the Strait of Hormuz remains locked down into June.
"Supplies are decreasing and Europeans like their travel. And the [summer vacation] season is coming," he said. "So, I can see flights being canceled. There will be a problem, there will be chaos."
Jain said if shortages become a bigger problem, the disruption would largely be orderly at first, with airlines continuing to cancel flights well in advance.
However, the situation is fragile.
"Shortages could hit secondary airports first, making last-minute cancellations far more likely," Jain said, particularly in Europe. "Major hub airports such as Heathrow, Amsterdam Schiphol and Frankfurt would likely receive priority fuel supply."
The supply situation differs within geographic regions. Also, procurement capabilities differ by airline.
In Europe, for example, the U.K. is the largest consumer of jet fuel and imports approximately 65% of it, according to Societe General, while Spain typically exports jet fuel.
In Asia, China is relatively protected by being the world's fifth-largest producer of crude oil and a global leader in refining capacity, though the country also relies on Middle East oil imports.
The U.S. similarly is well positioned as a global leader in crude oil production and jet fuel consumption.
However, demand for U.S. jet fuel exports has surged during the Iran war, driving up fuel prices for U.S. airlines, as well. Exports to Europe had approximately quadrupled on average as of late April, according to Societe General.
The situation is more constrained on the U.S. West Coast, where airlines are more reliant on supply from Asia due to the challenges of moving eastern U.S. jet fuel across the Rockies.
Alaska Air Group, with its West Coast and Hawaii focus, is especially exposed. In its Q1 earnings call on April 20, CFO Shane Tackett said Alaska Air Group typically sources about 20% of its fuel from Singapore, where refining margins have more than quadrupled during the war.
The situation has sparked investment advisors to downgrade Alaska.
Tackett, though, said Alaska does not foresee any shortages across its network
Tags: Dave Ruisard, Argus U.S. airlines Asia Shane Tackett Alaska Air Group
