Oil prices have dropped this month on expectations that the deadly coronavirus will lead to a slowdown in demand from China and beyond, but jet fuel consumption in the Asian nation already has taken a measurable hit on the back of travel restrictions aimed at curbing the infection rate.
Flight cancellations have reached about 30% in some parts of China, said Claudio Galimberti, head of demand, refining and agriculture at S&P Global Platts. The cancellations can result in about 200,000 barrels a day in reduction of jet fuel use globally, or 3% of global jet demand, he said.
Last week, the Chinese government placed a travel lockdown on the city of Wuhan, the center of the outbreak, as well as other cities in the nation’s Hubei province. The nation extended the Lunar New Year holiday by three days to Feb. 2 in an effort to contain the virus, which has infected more than 7,700 people and is responsible for at least 170 deaths, as of Thursday. Many countries have advised against non-essential travel China. Many airlines have suspended, or plan to suspend, flights to China.
Global flight cancellations averaged nearly 1,785 a day over the past four days, strategists at RBC Capital Markets wrote in a note dated Thursday. Data show that flight activity plunged 12% over the Lunar New Year weekend at five of China’s busiest airports, “and continues to track lower, down over 24% from normal,” they said.
‘We are early into the current coronavirus outbreak, but the risk to global air travel and the aerospace sector is substantial.’
Wuhan International is central China’s busiest airport, handling an estimated 25 million passengers in 2019, and it is roughly the 15th most active in terms of China’s passenger traffic, according to a research note from Ken Herber, analyst at Canaccord Genuity, released earlier this week.
“We are early into the current coronavirus outbreak, but the risk to global air travel and the aerospace sector is substantial,” said Herbert.
Analysts said that jet fuel represents a large share of China’s overall growth in oil demand.
Jet fuel demand has “accounted for some 15% of Chinese [oil] demand growth over the past five years,” according to strategists at RBC Capital Markets. An average annualized domestic growth rate of 11% makes jet fuel the “firmest portion of the demand story in China relative to other major refined products.”
The fuel market, however, hasn’t likely seen the full impact of coronavirus.
There’s a complicated relationship between crude oil and the oil product prices, with jet fuel related to diesel prices, which are in turn linked to crude prices—so the end users aren’t likely to see an immediate reaction to the recent declines in oil prices, said Galimberti of S&P Global Platts.
On Thursday, U.S. benchmark West Texas Intermediate crude saw its March futures contract
settle at $52.14 a barrel, the lowest finish for a front-month contract since August. It’s on track for a monthly loss of 14.6%. Global benchmark Brent saw its March contract
end the session at $58.29, the lowest since October, with prices headed for a monthly loss of 11.7%. Both benchmarks are poised to suffer their largest January percentage losses since 1991, according to Dow Jones Market Data.
The travel lockdown in China has affected approximately 100,000 to 150,000 barrels per day in road transport demand for gasoline and diesel in the Hubei province of China so far, out of the usual consumption of roughly 300,000 barrels per day, Galimberti said.
So road transport fuel demand in February may be “impacted severely,” with a large but “gradually” decreasing impact in March and April, with that fast approaching zero after June, as previous epidemic have shown, he said.
Retail gasoline prices fell below $2.50 a gallon on Wednesday for the first time since March, according to data from fuel-price tracker GasBuddy, which pegged the average price for regular gasoline at the pump late Thursday afternoon at $2.489.
Meanwhile, the U.S. Gulf Coast refined jet fuel spot price was at $1.5993 a gallon on Wednesday, according to data from the Oil Price Information Service, which says the number represents spot bulk purchases, generally by airlines and refiners, in the U.S. Gulf Coast. Prices started the year at $1.9366.
“The coronavirus is currently contained as a Chinese jet fuel demand story for now and not yet a global oil demand story,” said strategists at RBC Capital Markets. “Despite headlines of restricting travel from various countries or airports to China…we have yet to see a meaningful drop off in traffic among the biggest Asian airports excluding China.”
The strategists noted that several U.S. airlines have announced curtailment to flights to major Chinese cities, but that is not set to take place until early to mid-February.
“Timely and unprecedented measures taken by the Chinese government to restrict travel means that jet fuel demand will likely weaken further before it improves, but such action can help to prevent a longer, more protracted period of oil demand weakness,” said the RBC Capital Markets strategists.