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New York: Jet fuel's 100 per cent 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's American Airlines and UAL's United Air Lines are among carriers readying their biggest cutback in fuel use since 1991 because of the price. The US airline industry plans to ground 413 aircraft, eliminating 8.8 per cent 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 per cent this year, or 95,000 barrels a day, and 104,000 barrels a day in 2009, according to the US Energy Department. That will spur as much as a 90 per cent decline in the fuel's premium to heating oil futures, said Mike Busby, manager of oil and refined-products trading for Northville Industries 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. "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 per cent in the three months after September 11, 2001, a time when airline traffic plummeted 30 per cent.
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 20 cents a gallon more than the heating oil contract in the New York Harbour market on July 11, more than twice the average during the past five years. The fuel's premium should decline to two to eight cents a gallon by the fourth quarter, Busby said.
The airline cutbacks "should help bring the price down,'' said Peter Beutel, president of energy consultant Cameron Hanover in New Canaan, Connecticut. The current premium is because of "more than anything the summer demand, the peak demand.''
In 1991, when US jet fuel consumption slid 8.2 per cent, crude oil fell 40 per cent 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 December 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.
Less 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 rose 3.92 cents to $4.2766 a gallon in New York Harbour on July 11. It's gained 51 per cent this year, outpacing the advance in gasoline and diesel, and touched the record $4.36 on July 3.
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