Why air travel recovery won’t spark an oil price rally

Oil demand isn’t going to see a bump from air travel demand anytime soon, or so the International Air Transport Association (IATA) said in a recent press release.

And when it says anytime soon, the industry body means that air travel won’t return to normal for years. 

And this air travel is exactly the shot in the arm that the oil industry needs right now. 

According to the IATA, 2.8 billion passengers are expected to travel in 2021. That’s 1 billion more passengers than it expects will travel in 2020.

But that’s the extent of the good news as pertains to oil demand, which has seen considerable drop off this year as a result of all the pandemic-related lockdowns and travel restrictions imposed on the world.

The bad news is, those 2.8 billion passengers expected to fly next year is still 1.7 billion fewer than in 2019. Percentage-wise, that’s still an ugly drop off.

And the Revenue Passenger Kilometers, or RPK—a figure that the airline industry uses to track the total number of kilometers traveled by paying passengers—is expected to increase by 50 percent next year. Again, that’s the good news. 

The bad news is, this RPK is still 50 percent lower than in 2019.

The 2021 air travel recovery, such that it is, will come mostly from domestic travel within North America and Asia. The European market, however, relies mostly on international travel, and this is expected to remain stunted.

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The IATA summed up their bleak forecasts with this:“Passenger volumes are not expected to return to 2019 levels until 2024 at the earliest, with domestic markets recovering faster than international services.” 

The extra-bleak “at the earliest” qualifier should have the oil industry—and OPEC specifically—shaking in their boots. And they are. 

Exxon, for starters, shocked the industry on Tuesday when it decided to—finally—write down some assets. And boy, did it ever. I guess when you are one of the five largest oil companies in the world, you have to do things big. Its write down—which came after years of catching flack for having a no write-down policy for years—crushed any expectations for such a write down at between $17 billion and $20 billion. That should signal to the market that Exxon does not expect that an oil demand recovery is right around the corner. Expect others to follow.

Then there is OPEC, or OPEC+. They are desperately trying to control the market by balancing the supply side of the equation. This has been an effective measure in the past—and it has been semi-successful in staving off an oil price disaster this time around. But the new element for 2020 is that oil demand has crumbled by millions of barrels a day. It’s hard to drain inventories, which are still stubbornly persisting in the world’s most visible market—the United States—a whopping 6 percent above the five year average for this time of year. This is despite a 2.2 million bpd decrease in production in the United States, and millions more barrels cut by OPEC+ as part of a concerted effort to “rebalance” the market, which is code for keeping prices in a tolerable range. 

With the demand destruction brought on by the coronavirus and the excess inventory of crude caused by the oil price war in the month prior to the coronavirus, OPEC’s manipulations have been only partially effective. 

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And when we talk about demand destruction of crude oil, a huge chunk of it is consumed in the transportation sector. Global jet fuel demand accounts for 8 percent of the world’s total oil consumption. This means that when the forecast calls for a 50 percent reduction in RPK, we should expect a four-percent drop in crude oil demand. And this is for next year, not for 2020. And for years, the IATA is expecting air travel to be diminished. 

As for the promise of a vaccine, help is surely on the way. But a promising vaccine is not weeks away, and perhaps not even months away. The first half of 2021 is unlikely to see a huge bump in air travel increases as the vaccine candidates roll out to essential workers and at-risk individuals. Analysts are not expecting it to have a significant impact on air travel until the second half of 2021.

OPEC is well aware of the likely timetables of a vaccine rollout, and is well aware that demand will lag well into next year and even longer. This is why the group will most surely eke out a win that extends the current level of production cuts into the first three months (at least) of 2021, rather than allow its members to increase production by two million bpd starting in January as originally planned. 

Still, the Sunday after Thanksgiving was the busiest for US air travel since the pandemic started, but the oil industry shouldn’t bank on an extended rally anytime soon.

This article was originally published on Oilprice.com