An oil expert discusses the impact of the closure of the Strait of Hormuz on oil prices and jet fuel availability with ATW Editor-in-Chief Karen Walker.
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Karen Walker (00:10): Hello everyone. Thank you for joining us for Window Seat, our Aviation Week air transport podcast. I'm ATW and Aviation Week air transport editor-in-chief Karen Walker. Welcome on board. I am talking this week from Quito in Ecuador, where the Latin American and Caribbean Airline Association (ALTA) is hosting its fuel and sustainability conference. So I am absolutely delighted to be joined by a special guest and expert on all things oil and jet fuel, Felipe Perez. Felipe, welcome. Felipe is the director of fuel and refining Latin America at S&P Global Energy. And with that level of expertise and with everything that is going on in the Strait of Hormuz and with the Iran war, we've seen oil prices leaping and then leveling. It's like everything just changes in a blink of an eye and who knows where we're going with all of that. But oil and specifically jet fuel is a critical subject right now among airlines and airports worldwide.
(01:11): It's not just the high price of it that we're seeing, but also the availability of jet fuel. And it's a situation that I think Felipe can talk to very expertly about how precarious this situation is and the length of time that it could be happening. Let's go there first. If let's say it all is magically resolved in the next 24 hours, the war is all over and the Strait is reopened and those important tankers full of fuel can get through. What does that mean to the airlines and airports around the world? Do they suddenly see oil prices drop and suddenly have no concerns about shortages of fuel?
Felipe Perez (01:56): Yeah, so the situation doesn't change immediately. There's a dynamic to it. Airlines, airports will see with some relief, with some positive spirit, but physically to reestablish what we had at previous, the closure of the Strait and the war will take some time. So it's more a psychological relief than getting back to normal. It's not easy to reestablish the mass—or not to reestablish the mass, but to fix the mass and reestablish the flows and production levels, the availability of jet fuel that we don't have at the moment.
Karen Walker (02:43): Jet fuel is obviously what we're most interested in. The majority of the oil that's being shipped is Brent crude, but of course that doesn't work for an airplane. So can you talk to the difference, a little bit of difference between jet fuel and Brent crude? My understanding is that in general, for the oil industry, jet fuel is not a priority. So we are starting to see concern about shortages at certain airports.
Felipe Perez (03:11): That is correct. So the situation, as everybody has been saying, and people are a little bit tired, but it definitely is the largest energy crisis that the world has seen. The magnitude of the volumes that are not available is huge. So we have, of course, crude oil, we have refined products, including jet fuel. We have LPG, you have natural gas. So it's huge. It's a huge impact to energy markets. Now, looking specifically on jet fuel, jet fuel is at the eye of the storm when you look into this lack of availability of those refined products, because the Middle East was responsible for shipping out 400,000 barrels a day of jet fuel, and that is a large volume if you it put in context. This situation, it builds up on not having the flows, refineries cutting down on that production, and as you said, well, jet fuel is not the main driver when refineries are optimizing their operation for governments around the world.
(04:21): And for consumers, we think more about the gasoline to fill up your car first and then the cost of goods to be transported with trucks related to diesel. And jet fuel is that thing like, oh, okay, now airlines are charging more for tickets. So that's a situation where we see a big impact. So, lack of availability, cut of production, and now everybody's looking at their stocks, inventories around the world, Asia, Europe, and some countries in Asia are saying, "Well, we are not going to export anything. We're going to keep everything to ourselves because we are getting close to a situation of shortages on everything and jet fuel is part of it." So that creates a big problem. So, in our analysis at S&P Global Energy Analysis, we see that the loss of production is not huge. We estimated around 16% of the total demand of jet fuel in the world, but the available tradable volumes, that is bigger.
(05:32): So we are talking about, in our estimates, in S&P Global estimates, about 46%. So that's huge. So that's why you see this shock in jet fuel mainly that is this forgotten product in refined products. So, for refiners, but now we have this huge price hike and everybody's trying to figure out where I'm going to get it from and what price I'm going to be paying for this jet fuel.
Karen Walker (06:02): That's very interesting. Now, this is way too simple an analogy, but what you just said now, it's a little bit similar, but of course it's at this huge scale that's affecting airlines and airports of if there's a hurricane coming in and all of a sudden the supermarkets, they have no bread, everybody goes and they're storing, they're holding on. And it sounds to me like what you're saying is in some cases people are now holding onto their jet fuel. So that becomes a more scarce and a higher price commodity.
Felipe Perez (06:34): Right, that's right. So, countries will find ways to prevent chaos. Some countries, aviation is very important, maybe it's important venue for tourism and that drives economy, for example, and they need to provide jet [travel] to keep that part of the economy because some countries on the other side are being affected by high prices of gasoline and diesel. So they are all figuring out what to do in this situation, but the bottom line is that there's not enough for everybody. So regions like Europe, Latin America, Africa, they are very dependent on imports relative to their demand; they will be fighting to find those barrels. We hope the situation, if we get the Strait reopened with reestablishing those flows, that some calm will be back into the market, but things will take time. Nothing will be solved tomorrow … in a few weeks? It will take time. It's not a simple way because again, the scale of the disruption is huge, and the scale of the disruption is on the supply.
(07:51): And if we don't find ways to contain the demand, we all want to get on a plane, go on vacation. We have business, we are here in Quito on business, right? So that's still moving, but eventually there's not enough for everybody, as you use the analogy, going to the store and there's not bread for everybody. Somebody will have to split their bread or not have the bread at all at the end of the day.
Karen Walker (08:17): We've heard a few things from different organizations. So for example, they've been saying that Europe has about six weeks reserves of jet fuel, and that's not a lot when you think of how the forward planning the airlines and airports have to make for slots and schedules, and we're coming up to the busy summer season for that community. So do you agree with that? Six weeks doesn't seem a lot. Does that sound like it's a good safety margin or will people be rethinking that? And if they do rethink it, do they have the facilities to store larger amounts of jet fuel?
Felipe Perez (08:57): Definitely six weeks of inventories is not a lot, particularly when you think places like Europe that you have high demand for the fuel. It's very difficult to have a true figure of the values of inventories; it is the type of data that is not fully available publicly, but those are the estimates that we have. Some are saying six weeks, some are saying four weeks, some a little bit more. The bottom line, again, is just that if it's six or eight, it's still very low. It's just think about how fast you can go through that just if the demand stays at the same level. So that's the issue that we have. Now, how are we going to come out of this? So we are going to think what we think about the logistics, the reserves, do we start to pay more attention on jet fuel? Because again, it's an important part of the global economy.
(10:01): So there's no easy remedy, right? There's no easy medicine to solve that problem. So again, probably the airports and airlines know best exactly where those inventory levels may be. We see some concerns on the industry, and I think the industry will have to work together among themselves, working with airports, working with traders, working with governments to figure out a way to minimize or avoid chaos and a crisis of shortages. Again, it's not an easy task. I think everybody is somewhat hopeful that the solution will evolve. So how we manage this transition period with a big “if” we reestablish the flows, but in the meantime, I think there's a large concern to be taken seriously. It's not, again, that tomorrow you're going to go to an airport probably is not there, but you see the news coming, some airlines curtailing flights, airlines trying to figure out ways to share the available jet fuel.
(11:13): So something's happening there. So if it's six, eight, definitely something low that is making the industry, the aviation industry uncomfortable.
Karen Walker (11:24): Again, they're not direct comparisons, but the last big crisis for the airline industry, there all seems to be one, was of course the pandemic. If you look at this from an oil perspective, what happened there was that there was a sudden worldwide slump in demand for air travel, obviously they couldn't [fly], but there was also a worldwide slump in demand for oil because people weren't doing how they were using oil for. So the supply wasn't the issue, the demand was. Now what we're seeing in this crisis is the demand is still there from aviation and everybody else—people still want to go to fill up their automobile and et cetera—the supply is the issue. But am I correct in saying that because of what happened in the pandemic, you saw some refineries not being as active or ...
Felipe Perez (12:17): Well, it's different dynamics when you have a disappearance of the demand as it was in the pandemic. And there are two different dynamics. One is which side of the equation supply [or] demand and how you recover from it that is very important too, and I'm going to touch on that. So when the demand during the pandemic and the scale, just to put in context, the demand we're talking about about 8-9 million barrels a day that disappeared and the demand during the lockdown, the scale what we have now on the supply side and very, very clear of that difference, we're talking about 20 million barrels a day, right? That's huge here to 20% of the demand that we have. And as you said very well, so those will move different and how we come out is different. What I mean by that is that we went through lockdown, you're not spending a lot of money, then supply can adjust.
(13:17): It's a little bit easier when you don't have the demand in the situation that we had during the pandemic. And coming out of it, that's where I go about the dynamic is that, well, but then the disposable income for those that could maintain their jobs, of course, but you're coming now in a situation that, well, okay, now I'm tired of being in lockdown. I want to get on an airplane and visit someplace, go on vacation if you could afford that. So you have that boost. It took some time, but you have differences there. Now we are in this situation where the supply is not there, but everybody say, nobody wants to believe that you can't do anything. Nobody wants to go believe that I can't have milk at the store to go back to your analogy. So if we don't find ways to minimize this demand, it will be complicated.
(14:11): And that is more critical because you run out, you just don't have it enough. And to reestablish supply, it takes time just because of the structure of pumping oil out of the ground, getting the oil into a refinery, refining that and making the jet, the gasoline, and the diesel.
Karen Walker (14:32): And then getting it directly where it's needed.
Felipe Perez (14:34): Exactly. So that is just a little different, right? It's different speeds that you go about it. When you have supplies, everybody was okay, and then that catches up in different paces. So that's very important. And then you mentioned the refineries. So before the pandemic, there was this whole concept of peak demand. So, some companies were rethinking their strategy. So, a lot of refining capacity was shut down, and we came out of the pandemic, demand was better than expected and the market was kind of constrained and in a way, it was good for refineries, making money. The situation is similar now for the refineries now. Credits for jet and all the products are good, but now there's not enough crude. So even though if they want to make all the fuels, now you don't have the feedstock. It is a different story. So how are we going to come out of this with rethink about, again, from the refining perspective, from the users of the jet fuel, how we just rethink the business.
(15:39): Everybody is very concerned about energy security. There's going to be a discussion, and I think there's still a lot of lessons learned to take from this that we don't know yet.
Karen Walker (15:50): That's absolutely fascinating. I don't think any of us actually really know where things stand right now, but best viewpoint of where we are now from an airline perspective—airports and airlines, but very much from the airlines and the airline connectivity—do you have a feeling for how long it will take to do the recovery? I mean, just last year, crude oil was at per barrel, it was at about $70, about pretty low mark relative to other years. And of course, jet fuel is more expensive, but it was still a lot less than it is now. So they've already got that huge operational additional cost for airlines. So in terms of both costs and a feeling of safety that yes, that we'll be able to get the oil, what's your best guess of how long it's going to take for this industry to recover from this crisis?
Felipe Perez (16:46): Well, we've been analyzing the situation from the wellhead to pump the oil, to get that back on. There's things that you can just turn on the tap, and everything flows again. You mentioned it's complicated, right? Things need to be loaded on ships and ships need to move around and maybe you have weather here and there. So there's so many factors that take into account and the costs are there. So I think it is going to be interesting to see. But to answer your question on our best estimate, so in S&P Global Energy, we have a shipping team that was looking into what ships are available. If it's open, what would take, what routes will be preferential or not in some of our estimates. And we're getting the sense that maybe around two months, give or take, we could see some of that recovery, not to exactly the levels we were because there would be impact.
(17:49): So prices may still be a little bit high. It takes time, but just to get closer to the level of minimizing the disruption of what I was saying, this 400,000 barrels a day of jet fuel, that's our best estimate at the moment. So around one and a half, two months, more or less what we see in the market. But there's still a lot of things that unknowns and variables that we need to keep watching. I think it complicates our scenarios and the way of thinking our scenarios as S&P is moving towards the summer. So then you have summer vacations in the Northern Hemisphere where people maybe not choosing to fly, but then if they decide to drive gas prices are expensive, so there's something that it will affect. Definitely the airlines is affecting the airlines very much, but it could be more problematic if we don't have a solution before the summer in the Northern Hemisphere.
(19:04): Now, you mentioned price, right? So I think it's important to keep in mind that if it's $70 and $80, $100 a barrel for Brent, I think what the market wants to know is it is available? If we have jet at a certain price, okay, it is available. Can I plan my operations? Can I pass down some of this cost to consumers? Is the reality somebody needs to eat that, things will be expensive, then demand may adjust. But that's the thing we don't know today. Things are today, I mean, generally speaking, since the war started is every day you're going up and down and the market is ... Volatility always exists. It's speculation always going to exist, but not to the level we are seeing right now with this crisis. So we hope that we get some resolutions, flows, go back to some sense of normality, and we can have some visibility and availability of jet fuel for the airlines and for the world.
Karen Walker (20:15): That makes sense. Much as all the talk is about the high price of oil in general, but jet fuel, of course, for this industry, it's the certainty is the biggest factor, isn't it? It's the sort of the knowledge that we can still actually operate and know that we can get back from wherever we're going and do that schedule. So that's the key, the knowing. Absolutely. And I think we're still in the unknowing zone at some of it.
Felipe Perez (20:46): Right, right.
Karen Walker (20:48): Well, I'm sure you'll be tracking this. I'm sure your days are horrendously tracking of all of this. Let's all hope for the best here, but thank you so much for joining me, Felipe. This has been a really fascinating conversation about a very interesting situation. Thank you, of course, also to our producer, Cory Hitt, and of course a huge thank you to our listeners. Make sure you don't miss us each week by subscribing to Window Seat on Apple Podcasts or wherever you like to listen. This is Karen Walker disembarking from Window Seat.
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