April 16, 2010 / 11:58 AM / 9 years ago

Volcano clouds short-term European jet fuel outlook

* Jet fuel prices fall in early trade

* Two-day flight ban could cut 2 million barrels demand

* Eventual impact seen limited, unless disruptions continue

By David Sheppard and Emma Farge

LONDON, April 16 (Reuters) - The European air travel chaos caused by a huge ash cloud from an Icelandic volcano could cut jet fuel demand by nearly 2 million barrels, analysts and traders said on Friday.

The travel disruption is thought to be the largest since the Sept. 11 attacks, leaving thousands of planes parked on runways in Britain, France, Germany and across Europe. [ID:nSGE63F02E]

“Some demand will simply disappear — those who need to fly will eventually fly, but there will definitely be some flights that just do not take place,” said David Wech, oil analyst at consultancy JBC Energy.

JBC Energy’s forecasting model for oil demand sees European jet fuel consumption at an average of 1.17 million barrels a day in 2010. Assuming that an estimated 80 percent of Europe’s airports are shut for 48 hours, the disruption will snuff out around 1.87 million barrels of demand.

With the volcano in Iceland still spewing ash into the air, and high-level winds dispersing the plume over northern Europe, disruptions could potentially last for up to six month, according to volcanologists. [ID:nLDE63F0LB]

Demand in the jet fuel market has already been decimated by the recession over the past two years, but is on the verge of recovery with passenger numbers rebounding this spring.

Passengers on international flights were up by 6.8 percent in February from the same period last year. [ID:nLDE63E0J1]

FALLOUT

Airlines’ shares were hit on Friday with Lufthansa (LHAG.DE), British Airways BAY.L, Air Berlin AB1.DE, Air France-KLM (AIRF.PA), Iberia IBLA.MC and Ryanair (RYA.I) down between 0.8 and 2.2 percent. [ID:nLDE63F07I]

The declaration of a no-fly zone in Europe could slow the drawdown of jet fuel inventories, traders said.

At least 7 million barrels of an estimated 56 million barrels of oil products held in floating storage is thought to be jet fuel, according to ship broker ICAP. Jet stocks in independent tanks in Europe are also brimming. [ARA/]

“With an already depressed market, it doesn’t help the premium. It’s always the incremental tonnage that makes the difference,” said a jet fuel trader in London.

European jet fuel price spot differentials to the ICE-traded gas oil contract LGOc1 fell to $48 a tonne on Friday from $50.50 at Thursday’s close, Reuters data showed.

But flights will eventually resume and the price impact will be minimal, some analysts say.

“This is not an event like SARS where people were refusing to fly because of fear, which really did reduce demand. It’s a logistical nightmare for the airlines, but most flights will eventually take place,” Barclays Capital analyst Amrita Sen said.

Others mentioned that a large portion of airline buying is done through long-term deals and forward contracts as far as three years in the future, which should go some way to underpin jet fuel prices.

“The industry has faced bigger problems than this in the last two years,” Wech at JBC said. For a story on the impact on Asia jet fuel, click on [ID:nSGE63F0B8] (Editing by Sue Thomas)

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