Oil, especially crude oil, is one of the most traded commodities in the world. It’s not only the basis of many commonly used products, it is also vital in the creation of jet fuel. Therefore, there is an intertwined relationship between the aviation industry, and the demand for crude oil.
For those who partake in crude oil trading the events and elements of airlines, and their fuel usage, is a key component of fundamental analysis. But is the rise in value of oil, at the time of writing, due to the increased demand from the airline companies? In this article, we will explore further the recent volatility in the oil market, as well as the impact that the aviation industry has on its value.
Recovery of oil prices
In 2020, the oil futures market saw a price movement that has never been recorded before in trading history, when the price of oil reached below zero. There was a surplus supply of oil in comparison to the level of demand, and so it reached the point where storage of the commodity became an issue. It was such an unprecedented moment in the oil trading sector that there was a case of buyers paying for the oil to be taken off their hands. This meant that the Organisation of Exporting Petroleum Countries (OEPC) had to intervene to minimise the supply end of the process, to offset the lull in demand.
This dramatic fall in prices can be attributed to the substantial decline in air travel. The worldwide pandemic meant that there were enforced travel restrictions which saw flights grounded, and essential jet fuel being unused. Air passenger traffic was way below average levels, and therefore the demand for fuel from airlines dramatically fell.
However, just as much as it can determine the fall of crude oil, so can the aviation industry cause its rise. According to oil experts and market analysts, there has been a recovery for oil prices recently (at the time of writing), and this trend is expected to continue.
According to the International Air Transport Association report on air cargo and air travel markets, global air travel improved in March this year but was still 67.2% lower than in March 2019. As a result, the market has seen a boost in crude oil prices, as the demand for jet fuel is shown to be a critical factor that can affect its value.
The movement in the market is also a reaction to the easing of lockdowns in Europe, with EU and UK officials submitting plans for easing travel restrictions by the summer of 2021. This relaxation of restrictions has also begun in the US, as the number of people who have received their doses of the vaccination increases.
However, this comes at a time where the usage of aeroplane fuel is dependant on the number of COVID-19 cases, infections rates, the strictness of lockdown restrictions as well as the success of vaccines. These circumstances are unlike anything witnessed before by the aviation and oil industry alike, and so are all key factors to consider when it comes to the price of oil.
The effect of low prices on airlines
Just as much as the demand for fuel can affect the price of oil, so can its low value have an impact on the aviation industry, and in some cases for the better. As aforementioned, the commodities market saw prices for oil reach incredibly low levels, which would have been taken into account in terms of costs, equations and budgets for airlines.
For some airline companies, depending on their investment interest and hedging positions, they have seen a profit from falling prices. Lower fuel prices have had a major influence on aviation, and in some case on the airline’s fleet in particular.
For example, Qantas airlines postponed the retirement of two of its aeroplanes, as the demand for international travel increases and fuel remains cheap. Malaysia Airlines reactivated planes from storage, whereas United airlines have extended the lifespan of some of their planes.
Looking to the future, as more airlines invest in their air fleet and infrastructure, there may be a surge in demand for jet fuel again, which as previous trends indicate, will have a subsequent effect on the price of crude oil.