Airlines might struggle to keep flight costs down this summer after members of top oil producing cartel OPEC+ agreed to extend crude output cuts into next year, which could subsequently lead to higher prices for the black gold and more expensive flight tickets.
At the time of writing, oil prices were trading lower with US crude oil, or West Texas Intermediate (CL=F), down 0.71% to $71.23 (£57.26) a barrel and Brent crude (BZ=F) 0.71% lower at $75.75 a barrel. Meanwhile, FTSE airline stocks, including IAG (IAG.L) and EasyJet (EZJ.L), were mixed.
Yahoo Finance spoke to some market experts for their thoughts on where oil prices may be heading and how it might translate to higher prices for holiday flights. Moreover, consumer group Which? shared its thoughts on whether holiday shoppers should be buying flights for Christmas now, as a result Read on for all the details.
Oil cuts lifting crude prices
Oil prices are trading lower today but it may not extend losses for long, however, as investors continue to digest the impact of Saudi Arabia announcing a voluntary production cut of 1 million barrels per day (bpd) from July, which will take its production to the lowest level in several years.
That’s on top of the broader OPEC deal. The cartel currently has in place cuts of 3.66 million bpd, amounting to 3.6% of global demand. The cuts were valid until the end of 2023 but have now been extended until the end of 2024.
Danni Hewson, head of financial analysis at AJ Bell, said that Saudi Arabia’s decision to cut output from next month has rekindled concern that the oil price will remain artificially elevated – something airline bosses, governments and central bankers will be considering.
“Fuel plays such a huge part in the inflationary environment that the current chess game being played is cause for concern in inflation-weary western countries,” he said.
Meanwhile, Giles Coghlan, chief market analyst consulting for HYCM, told Yahoo Finance that the crucial questions now revolve around the impact of the strategic move by Saudi Arabia and OPEC+ members on oil prices in the future.
“As we enter the second half of the year, market participants have been forecasting tighter oil markets, potentially leading to upward price trends that could, in turn, drive prices upwards for both airlines and consumers.
“It is worth noting that while production cuts are often agreed upon by all OPEC+ countries, not all of them consistently adhere to the agreed quotas. There have been murmurings that Saudi Arabia is unsatisfied with the production levels of other OPEC+ countries which could, in the worst case scenario, cause Saudi Arabia to flood markets as a message to wider OPEC members. Production cuts only work when the market perceives them as credible,” he said.
Higher price for air travel
However, as it stands, the cuts are going ahead and less oil to the global markets could mean higher oil prices, as also noted by Coghlan. Meanwhile, Goldman Sachs said the development could add some $6 per barrel, depending on how long the cut is kept in place.
As a result, with oil being the main element of an airline’s cost base, consumers are likely to bear the brunt as the high oil prices get passed onto them through higher ticket prices.
However, Craig Erlam, senior market analyst at OANDA, was more bearish on the possibility of oil prices lifting flight prices.
“I think we’ve seen from the market response to the cuts that traders don’t view the Saudi cut as a game changer. Of course, a lot may change over the coming months and into next year but with the economic environment deteriorating and facing further downside risks from higher interest rates, the case for much higher oil prices doesn’t appear particularly strong. And as we’ve seen from the past two output cuts, the price didn’t take off like many expected. That may change if the outlook brightens but so may production targets.”
It comes off the back of industry bosses saying on Monday that airlines will fly 4.35 billion passengers this year, close to the 2019 record, as the industry bounces back from the Covid-19 pandemic.
Net profits for the sector are also forecast to reach $9.8bn in 2023, double previous estimates, buoyed by the end of China’s Covid-19 restrictions lifting activity and demand again, according to the International Air Transport Association (IATA).
IATA director general Willie Walsh said in a statement during the association’s annual general meeting in Istanbul, however, that jet fuel prices remain high, despite easing over the first half of the year.
“On the cost side, there is some relief,” Walsh said. “Economic uncertainties have not dampened the desire to travel, even as ticket prices absorbed elevated fuel costs,” he added.
However, those ticket prices could change forecasts if further costs make a getaway unaffordable.
Time to book Christmas flights?
Rory Boland, editor of Which? Travel, shared his comments with Yahoo Finance on whether consumers should be booking holiday flights ahead given the potential rise in airfares.
"While there are multiple factors that dictate flight prices, the strongest driver for the high fares we are currently seeing is simply huge demand. That's unlikely to change in the short term.
"In the past our research has indicated that the best prices for fixed holiday periods are found by booking in advance, and that's especially true of Christmas. Wherever possible, shop around to compare prices, and if you can be flexible on your specific travel dates, setting up price alerts can help you secure the best prices," he added.
Impact on airline stocks
FTSE airline stocks were mainly trading in the red on Tuesday following the latest developments on oil cuts, despite the positive outlook update for the summer from industry bosses. However, today, they were more mixed suggesting some optimism among investors.
Ryanair (RYA.IR) stock was also down on Tuesday, by 1.36%, but traded flat on Wednesday.
Watch: OPEC announces global oil supply cut just in time for summer