A golden week for air transport in China could stop the fall in oil prices

(Bloomberg) — Global oil traders are focused on the next milestone in China’s economic recovery as travelers pack their bags and head to the airport for the Golden Week holiday in early May.

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About 170 million Chinese vacationed abroad in 2019 before the pandemic hit. That figure fell to less than 9 million last year at the height of China’s lockdown. The prospect of dramatically more air travel explains why China’s jet fuel consumption is seen as the biggest driver of global oil demand growth this year, according to JPMorgan Chase & Co.

The signs are encouraging. Overseas ticket demand for Golden Week is 120 percent of 2019 levels, state media reported, citing an estimate from Trip.com. As of April 18, actual bookings were more than 10 times higher than last year, Securities Daily reported.

“Domestic demand for jet fuel in mainland China has recovered almost fully, while international demand for jet fuel has recovered to nearly 70% of pre-Covid levels,” said Fenglei Shi, director covering Chinese oil markets at S&P Global Commodity Insights. It is therefore possible that the Golden Week will mark an almost full recovery in China’s overall fuel consumption, she said.

The global oil market has been caught between two competing themes this year: advanced economies drifting into recession and the promise that China’s reopening could dramatically boost demand after a three-year slump in consumption due to Beijing’s Covid restrictions. Crude oil has fallen in recent days as the US economy stagnates and the prospect of further interest rate hikes add to price headwinds.

If Golden Week gives a big boost to air travel, it will signal that demand is back on track and support some of the more bullish views on prices. But too few travelers will be further evidence of China’s relatively muted reopening, which has disappointed commodity markets hungry for a return to normalcy in their biggest buyer.

The latest economic data bodes well for a recovery. Retail sales rose in March as households opened their wallets to spend on services, and Golden Week is likely to unleash more pent-up tourism demand. While domestic travel showed a strong recovery, outbound flights lagged due to fewer aircraft, expensive fares and residual restrictions on international travel.

The total number of passenger flights on the mainland should return to pre-pandemic levels in the second quarter, according to a forecast by the China Air Transport Association. But the international component of that will still be less than half of what it was — and overseas flights account for about 30 percent of the nation’s jet fuel use, according to BloombergNEF.

Jet fuel will be the biggest component of China’s demand recovery this year because “it was the laggard and the one that didn’t catch up,” Macquarie Group strategist Vikas Dwivedi said, although he warned that Chinese consumption could prove ‘good’ enough, but not great.”

Macquarie estimates China’s demand for jet fuel will grow by 430,000 barrels per day this year from last year. That’s nearly half the 900,000-barrel increase forecast for China’s oil demand overall as its huge economy reopens. And that’s more than a third of the 1.2 million barrels of global jet fuel demand growth forecast by the International Energy Agency.

One Shanghai multinational executive, who asked to be identified only by his first name, Weichen, said he was looking forward to resuming his twice-yearly routine of overseas travel during the upcoming holiday.

First, a trip with friends to Java, Indonesia, to see a famous Hindu temple there; then later in the year she will go shopping in Bicester Village near London with her parents.

–With help from Elizabeth Lowe.

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