Ukraine crisis: Crude price may stay around $100 for 3 months, says CAPA

Bad news for airlines as fuel accounts for 40% of expenses. On Tuesday, OMCs hiked ATF price by 8.7% to Rs 93,530.6 a kilolitre. On a year-on-year basis ATF is up by 57%

Crude oil prices may average around $100 for three months due to the ongoing hostilities between Russia and Ukraine, according to a report by aviati­on industry consultancy CAPA.

Meanwhile, Brent crude hit $107/barrel, costliest in eight years. 

This is bad news for airlines in India as fuel accounts for around 40 per cent of their expenses. On Tuesday, state oil marketing companies hiked aviation turbine fuel (ATF) rates by 3.3 per cent to Rs 93,530.6 a kilolitre. On a year-on-year basis, ATF price is up by 57 per cent.

“Based on our assessment, we estimate that during FY23, average Brent crude price will remain in the $75-85 per barrel range. 

The prices may average at an elevated level of around $100 for about three months. This is due to the additional geo-political risk premium. Thereafter, it will move to a lower trajectory, largely driven by regular contributing factors,” CAPA said. 

The contributing factors include demand-supply issues and macroeconomic factors.

“At 10-12 million barrels per day, Russia is the second largest exporter of oil with a global share of 11-12 per cent. The current conflict, which is still evolving, has the potential to create disruptions to this supply,” CAPA said.

According to the International Energy Agency (IEA), world oil demand is set to reach 100.6 million barrels per day in 2022. This is up from 97.4 million barrels per day in 2021 as Covid-19 restrictions continue to ease. Global oil supply closely mirrored demand and rose to 98.7 million barrels per day in January.

“Based on the core demand-supply dynamics, the global annual demand growth is unlikely to lead to any price disruptions. This is because production will support demand unless there are global supply chain disruptions,” CAPA said.

The report also states that Iran could play a very important and instrumental role in the supply and pricing dynamics.

Meanwhile, the rising crude prices is hurting airlines but on the positive side, demand has been seeing a rebound.

While domestic air traffic fell 42.7 per cent to 6.4 million in January on a month-on-month basis, February saw a pick-up in demand. 

With Covid cases ebbing and states relaxing restrictions, airlines have seen a sharp rise in seat occupancies. 

The growth of traffic in February has come on the back of fewer flights compared to January, said analysts.

The International Air Transport Association (IATA), too, expects overall global traffic to reach four billion in 2024 (counting multi-sector connecting trips as one passenger). 

This will be exceeding the pre-Covid levels.

“The trajectory for the recovery in passenger numbers from Covid-19 was not changed by the Omicron variant. People want to travel. And, when travel restrictions are lifted, they return to the skies. There is still a long way to go to reach a normal state of affairs. However, the forecast for the evolution in passenger numbers gives good reason to be optimistic,” said Willie Walsh, IATA’s director general.