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Oil Is Down Because Jet Fuel Demand Could Stay Weak - Barron's

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Air travel is recovering from its lows in April, but it remains extremely subdued and will probably not fully bounce back next year. The International Energy Agency (IEA) said in a monthly report released on Thursday that weak jet fuel demand is the main reason it is reducing its overall demand expectations for this year and next.

Brent crude, the international benchmark, dropped 0.4%, to $45.26 a barrel on Wednesday. West Texas Intermediate crude futures fell by 0.1%, to $42.62. Oil stocks were also slumping, with Exxon Mobil (ticker: XOM) down 1.3%. The dip comes after a relatively bullish period for oil.

The IEA had some positive things to say about the oil market, noting that demand outstripped supply in June. Better demand and lower supply is a good sign, but the market remains unbalanced because hundreds of millions of barrels were placed into storage during the depth of the crisis. All that extra oil will likely depress prices for months.

Rising Covid-19 rates in the U.S. and elsewhere also threaten the recovery.

“Ongoing uncertainty around demand caused by Covid-19 and the possibility of higher output means that the oil market’s rebalancing remains delicate,” the IEA said.

While driving is rebounding in the U.S. and elsewhere, jet fuel “remains the major source of weakness,” it said.

In April, air travel was down “nearly 80%” year over year, the IEA said. By July, it was still down 67%. And the organization does not sound optimistic that the trends will improve in the near term.

“With few signs that the picture will improve significantly soon, we have downgraded our estimate for global jet fuel and kerosene demand,” the IEA said. “In 2020, demand will be 4.8 million barrels a day, or 39%, below the 2019 level, and in 2021 the year-on-year recovery will be just below 1 million barrels a day.”

That led the IEA to reduce its 2020 demand estimate, to a drop of 8.1 million barrels per day from 7.9 million.

Other analysts are more optimistic about airline travel, and clearly the market has been more positive on air travel in recent days. Many airline stocks have been up by double-digit percentages in recent days. Spirit Airlines (SAVE), for instance, has doubled from its March lows, as the market for budget travel has improved.

Write to Avi Salzman at avi.salzman@barrons.com

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