The Return of Travel Could Drive Oil in 2021

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  • The number of passengers flowing through US Transportation Security Authority (TSA) security check points has shrunk to levels about 60% below pre-pandemic numbers
  • Companies are planning for less business travel than in the pre-pandemic world, even when health fears recede

As 2021 rolls on, the path of COVID-19 appears to be a primary driver of oil prices, relegating some important fundamentals to a secondary role. While travel-related demand has been steadily improving, the resurgence in COVID-19 cases due to variant strains of the disease are being watched closely, and could affect the course of economic recovery

While U.S. shale production shrank further coming into 2021, as WTI crude oil prices hovered around $40/barrel, production has now begun to increase as oil prices staged a recovery to around $70/barrel. At the same time, Libyan and Iranian production is increasing, and Saudi Arabia and Russia are maintaining production discipline. All these are critical supply factors to consider.

Can Transportation Rebound?

The primary driver for oil in 2021 may well be the path of the virus and how it influences the transportation industry, especially airlines. Jet fuel is a meaningful component of oil demand in its refined state, and airline travel remains severely constrained in countries where the virus has not been well contained.

As 2020 drew to a close, another wave of the virus kept U.S. domestic travel demand severely dampened. The number of passengers flowing through TSA security check points each day has flat-lined at levels about 60% below pre-pandemic numbers.

US Passengers Chart
CME Group 

The picture is the same in Europe, where travel among countries is highly constrained.

China is the only outlier. The virus hit China first. However, China was also the first country to make solid progress in containing the domestic spread of the virus. Chinese domestic air travel is now almost 90% back to pre-pandemic levels.

Chinese Airline Passenger Traffic Chart
 CME Group

International air travel has started to recover, however, the rise in infections due to the Delta variant has prompted foreign countries, such as those in the EU bloc, to reimpose restrictions, regardless of vaccination status. The travel industry is keeping a close watch on these developments and hopes they will subside sooner, rather than later.

Less Business Travel Expected

Even as vaccination levels around the globe continue to improve, and progress is made in containing the virus, business travel may take years to recover to pre-pandemic levels. Work from home and virtual meetings have taken over the business world. Companies are planning for considerably less business travel than in the pre-pandemic world, even when health fears recede, and travel restrictions disappear.

The collision of the virus’s influence on demand with complex supply fundamentals may make for a volatile year for oil prices. The path of the virus may determine the broad trend, up or down, from a demand perspective, while the ebbs and flows of supply surprises around the world may generate substantial noise.

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