Singapore, 16 May (Argus) — Volatile oil prices could still spike in the short team on the back of increasing demand and tightening supplies, according to Japanese bank Nomura, with the unpredictability adding to the problems of airlines trying to manage their jet fuel expenditure.
Major Asia-based airlines, including regional leader Singapore Airlines (SIA), have identified surging fuel prices as among the key challenges to their businesses in the coming year. SIA spent $3.81bn on jet fuel in the 2010-11 financial year ending 31 March, higher by 7.6pc on the previous year and accounting for 35pc of its total expenditure.
US benchmark WTI crude values suffered a record decline last week, falling from close to $115/bl to just under $95/bl in a matter of days. But a potential increase in Japanese oil demand during the summer peak power consumption season and the effect of lost Libyan crude output should continue to exert upwards pressure on oil prices, Nomura said.
Crude output from Libya, which is currently engulfed in violent political unrest, represents only 2pc of the global supply. But it accounts for 7pc of the world' global sweet crude capacity, the bulk of which is exported to Europe. Sweet crude is a rich source of jet fuel and gasoil, Nomura said.
The loss in Libyan crude also comes as refineries around the world are returning from a peak turnaround season, with 2mn b/d of refining capacity due to resume operations from April to July. Half of this returning capacity is from Europe. This represents 8pc of the total refinery throughput in Europe, which could increase the region's demand for light sweet crude, Nomura said.
Oil demand in Japan could also rise as the country turns to oil-fired power plants to replace lost power generation from nuclear facilities closed in the wake of the devastating 11 March earthquake and tsunami. Based on the increase in oil demand for power generation last year, Japan could need an additional 180,000 b/d of oil in the third quarter of this year compared with the second quarter, Nomura said.
Other factors such as a seasonal increase in gasoline demand in the US with the summer driving season, as well as long-term growth in Indian and Chinese oil consumption should also support oil prices, Nomura added.
But reduced liquidity with the end of quantitative easing monetary policy in the US in June, could moderate oil prices after the northern hemisphere summer. Nomura forecasts benchmark Brent crude prices to average $110/bl in the third quarter and $103/bl in this year's final quarter.
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