Bloomberg.com: Exclusive
July 14 (Bloomberg) -- Jet fuel's 100 percent rise over the past year to a record $4.36 a gallon is setting the stage for its decline in the next six months.
AMR Corp.'s American Airlines Inc. and UAL Corp.'s United Air Lines Inc. are among carriers readying their biggest cutback in fuel use since 1991 because of the price. The U.S. airline industry plans to ground 413 aircraft, eliminating 8.8 percent of seating capacity, as increasing fuel costs spur losses of as much as $13 billion, the Air Transport Association says.
Fuel demand will fall 7.5 percent this year, or 95,000 barrels a day, and 104,000 barrels a day in 2009, according to the U.S. Energy Department. That will spur as much as a 90 percent decline in the fuel's premium to heating oil futures, said Mike Busby, manager of oil and refined-products trading for Northville Industries Corp. in Melville, New York.
``People are responding to a doubling of prices and the airline industry is one industry that is responding,'' said Edward Morse, chief energy economist at Lehman Brothers Holdings Inc. ``The markets will weaken significantly after the third quarter.''
The decline in airline fuel consumption parallels the drop in gasoline sales to a five-year low as drivers take vacations closer to home and use mass transit. Crude oil declined 35 percent in the three months after Sept. 11, 2001, a time when airline traffic plummeted 30 percent.
Jet fuel, along with diesel, is traded at a differential to heating oil futures because the fuels are made from similar components of crude oil at the refinery.
Jet fuel, a form of kerosene used to power jets, sold for 19.5 cents a gallon more than the heating oil contract in the New York Harbor market today, twice the average during the past five years, according to data compiled by Bloomberg.
The fuel's premium should decline to 2 to 8 cents a gallon by the fourth quarter, Busby said.
Price Decline
The airline cutbacks ``should help bring the price down,'' said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. The current premium is because of ``more than anything the summer demand, the peak demand.''
In 1991, when U.S. jet fuel consumption slid 8.2 percent, crude oil fell 40 percent from a high of $32 a barrel in January to $19.12 by the end of the year. Jet fuel traded at a 1.55 cent discount to heating oil by Dec. 11 of that year, down from a 3.85 cent premium six months earlier.
Lehman Brothers expects crude oil to average about $90 in the first quarter of next year. Oil climbed to a record $147.27 a barrel on July 11 amid rising fuel demand in China and India, and the potential threat of an Israeli air strike on Iran. Airline cutbacks may help send the price to $107 a barrel in 2009, Merrill Lynch & Co. said in a July 7 report.
Falling Demand
Demand for oil will be less than half of initial forecasts, increasing by 616,000 barrels a day, because of the slide in transportation use, Merrill Lynch said.
Jet fuel fell 1.67 cents to $4.2599 a gallon in New York Harbor today. It's gained 50 percent this year and touched the record $4.36 on July 3.
Heating oil for August delivery fell 1.17 cents, or 0.3 percent, to settle at $4.0649 a gallon on the New York Mercantile Exchange today. The contract reached a record $4.1586 a gallon on July 11.
U.S. jet fuel consumption for the four weeks ended July 4 was 2.2 percent lower than a year earlier, according to Energy Department data.
`Demand Destruction'
``There is definitely demand destruction going on,'' Sung Yoo, an oil analyst at JPMorgan Chase & Co., said in a telephone interview. ``We could see a bit of a pullback of the entire oil complex after the summer.''
Last month, Northwest Airlines Corp. said it would ground 14 Boeing Co. 757 planes and Airbus jets during the final three months of 2008. Overall, Northwest is reducing its domestic and international flying by up to 9.5 percent, the airline said in a regulatory filing.
Airline cutbacks are part of a broader trend in which higher fuel prices are reducing consumption. U.S. gasoline demand in the four weeks ended July 4 averaged 9.3 million barrels a day, down 2.1 percent from the same period a year earlier.
The reduction in U.S. fuel consumption may not be sufficient to reverse oil's climb toward $200, said Adam Sieminski, chief energy economist at Deutsche Bank AG. ``The difficulty is that demand is still rising in China and the Middle East and the rest of the world'' while oil production may be leveling off, he said. ``What price does it take to have demand growth go to zero to match zero supply growth? That's very scary because it might take a really high price.''
Overseas Expansion
While U.S. airlines cut back, some carriers overseas are expanding, ``soaking up demand reductions achieved in the United States,'' Merrill Lynch said in a July 4 report.
Exports of the fuel for the first four months of the year averaged 55,000 barrels a day, the highest since 2005, U.S. Energy Department data show. For the week ended July 4, U.S. jet fuel imports fell to 34,000 barrels a day, the lowest since Aug. 19, 2005.
The narrowing of jet fuel's premium to heating oil may be limited if refiners don't increase crude processing rates, Beutel, the energy consultant, said.
``One of the biggest factors here is the simple inability of refiners to bring up their runs,'' he said. ``We are still below 90 percent and that is unheard of.''
Operating Rates
Refiners have operated at an average of 86.4 percent capacity this year, the lowest since 2001, Energy Department data show. U.S. jet fuel production averaged 1.62 million barrels a day, 3.5 percent lower than a year earlier and inventories of 38.8 million barrels were 6.1 percent lower than a year earlier.
The airline cutbacks also may not be as bad as expected, said Jason O'Connor, head of refined products trading at Starsupply Petroleum, a division of GFI Group Inc., in Norwalk, Connecticut.
``With the airlines, a lot of this could be political posturing,'' he said.
To contact the reporter on this story: Robert Tuttle in New York at
rtuttle@bloomberg.net
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