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Jury out on jet fuel

The FALL in jet fuel demand, because of the slump in the air travel market in the wake of the 11 September terrorist attacks in the US, may not be as severe as originally thought, according to a report from the International Energy Agency (IEA)*.

The prolonged closure of US airspace immediately after the incident, indications that airlines are carrying fewer passengers and the financial difficulties at many carriers (especially in Europe's overcrowded marketplace) had led to forecasts of a drop in jet fuel demand of up to 25%. However, the IEA says available delivery data received so far suggests the decline in demand since the attacks has fallen far short of expectations.

For October, preliminary data for some of the largest OECD economies show deliveries of jet fuel and kerosene fell everywhere, except in Japanthe fuel's second-largest market. However, the decline in rates was relatively benign. In the US, the prime target of the attacks, the drop in October was less than 9%, down from a double-digit decline in September, and contrasting with drops in air traffic in the 20-35% range.

Moreover, the IEA says the steeper decline rates in preliminary estimates of September sales have since been revised. For OECD Europe, aggregate jet fuel and kerosene demand is now 1.9% lower than September 2000 levels. Steeper decline rates for Asian and North American demand, of 11.6% and 13.7% respectively, bring the IEA's OECD average for September to 9.5% below September 2000.

The apparent recovery in North American deliveries in October, with an estimated year-on-year decline of only 6.5%, brings the overall OECD figure for that month to just 8.8% below 2000 levels.

The IEA warns, however, that while the decline in jet fuel demand may have been overestimated, it is still too soon to say for certain. It notes that preliminary data remain potentially subject to revisions, adding: 'If recent experience is any guide, preliminary data for deliveries of jet fuel are liable to even deeper revisions than those for other products.' 

In some cases, deliveries to foreign airlines are not included in domestic data. Also, the smaller-than-expected decline in demand remains at odds with announcements by airlines confirming cuts of up to 20-35% in air traffic in Europe and North America, as well as reductions in fleet capacity. Many airlines are still working on rescheduling routes and have not yet fully implemented reductions in capacity.

The report says: 'Two months of surprisingly benign data do not make a trend. That jet fuel inventory levels appear to have been drawn down aggressively since the attacks and that refiners have been sharply reducing their jet fuel yields also seems inconsistent with the notion of resilient jet fuel demand.

Rather, it seems possible that, in the face of sharply reduced end-user consumption, demand for jet fuel storage has plummeted.

Rather than face the burden of excess inventory capital and storage costs, stockholders might have sought to draw down their tanks, possibly by selling jet fuel at discounted rates or by blending it into other products, thereby boosting apparent demand.' 

The uncertainty about future demand is not confined to jet fuel. The IEA's latest monthly report says growth forecasts for this year and next remain unchanged, as statistics 'do not yet show a clear impact' from the September attacks on consumption patterns.

Recent economic data, which suggest the possibility of a faster-than-expected rebound in the US economy, also fail to rule out a protracted global downturn, the report says. Pending further data, the IEA's estimate of oil product demand growth remains at roughly 100,000 barrels a day (b/d) for this year and at about 600,000 b/d for 2002.

*IEA: Interpreting the Numbers - Jet Fuel Demand, December 2001

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