The war in Iran is disrupting oil shipments through the Strait of Hormuz. This is not only driving up pump prices but also pushing up jet fuel prices. What’s more, analysts say there is a real risk of a physical shortage of jet fuel in the future.
Lufthansa and Brussels Airlines, among others, are downplaying jet fuel shortages, partly thanks to new contracts with other suppliers. Still, according to a report by investment bank Goldman Sachs, stocks in the port of Antwerp, Rotterdam, and Amsterdam – referred to as the ARA region – have fallen to their lowest level since March 2020, the start of the COVID-19 crisis.
Strategic reserves under pressure
According to the business newspaper De Tijd, which cites the report, the ARA indicator showed a total inventory of just over 550,000 tons across the three ports combined over the past two weeks. It has been since March 2020, when inventory stood at 395,000 tons, that storage tank levels have been this low. Goldman Sachs analysts are therefore clear: With current inventories, the sector would have another 30 days of supply.
Several countries, including India and Thailand, have already reported fuel rationing or supply disruptions, while governments in other parts of Asia have introduced measures to manage consumption.
And although major economies such as China and Japan maintain substantial strategic reserves and are therefore, like the U.S., better positioned to absorb the shock, local shortages could increase if the disruptions in the Strait of Hormuz persist.
This is particularly true in the region’s most dependent on imports, including Europe, and specifically the ARA ports.
Import to a historic low
As a result of the Iran conflict, European imports of Middle Eastern aviation fuel fell to a historic low in April. The International Energy Agency (IEA) therefore warned that Europe could run out of jet fuel by mid-May.
It hasn’t come to that yet, although airlines such as Lufthansa and KLM have already canceled flights to save fuel, or was it an excuse to cancel unprofitable flights, as some experts suggest?
Furthermore, the rapid decline in stockpiles at ARA ports is also due to exports to Asian countries. Because prices in the ARA region are relatively lower than in Asia, these countries are buying up the jet fuel.
No signs of acute physical shortages
For the time being, there are no signs of acute physical shortages, partly because strategic reserves are being released gradually in case of an emergency. However, cooperation with other European countries is crucial to prevent those reserves from leaving ports immediately.
Moreover, Europe is not standing idly by either. Measures already discussed or implemented include easing rules on the use of U.S. “Jet A” fuel in Europe. Jet A-1, the standard in the rest of the world, has a lower freezing point of −47°C compared to −40°C for Jet A, making it more suitable for international flights at high altitudes. And the U.S. has significantly ramped up its exports of jet fuel to Europe, to about six times the normal level.
Also on the bucket list: creating a kerosene observatory for real-time monitoring and reviewing minimum mandatory stock levels.
But even if the Strait of Hormuz were to be fully reopened right now, the market would still need months to recover. If the reopening is delayed by a few more weeks, the recovery would not be complete until 2027.
And then summer, with its peak travel season, is still to come. Goldman Sachs therefore warns that commercial inventories in Europe could fall below the critical 23-day threshold in June.
The market is nervous.
Experts therefore advise travelers planning to fly this summer and fall to book now, if they haven’t already. After all, no one knows how long the fuel shortage will last or how much pressure on airlines will continue to mount.
But at some point, the cost of travel, including fuel prices, will exceed revenue, which is why ticket prices are rising and will likely continue to do so.
It is, therefore, an understatement to say that the market is especially nervous, as July-August is when airlines make a disproportionate share of their annual profits.
