Oil data from SARS era offers clues to impact of China virus

Oil traders reacted to the outbreak of the coronavirus in China by dumping contracts for crude, diesel and jet fuel. Data from the last Chinese epidemic offer some clues as to whether the selloff is justified.

The 2003 outbreak of Severe Acute Respiratory System, or SARS, did indeed crimp demand, according to figures provided to Bloomberg by the International Energy Agency. Consumption of jet fuel took a big hit, but use of other oil products was resilient to the disruption caused by the virus.

As China scrambles to contain the current epidemic, the oil market’s focus has again been on demand for jet fuel. The nation has been brought to a near standstill as the government curtails both domestic and international travel. Profit margins from making aviation fuel in Asia have slumped to the lowest in almost four years.

A glance back to 2003 shows these concerns are valid. Annual jet fuel consumption in China grew 28% in 2002 but increased just 1% in the year of the SARS outbreak, a difference of about 34,000 barrels a day. Growth rebounded to 24% in 2004.

Since that period, China’s demand for jet fuel has grown sixfold to nearly 700,000 barrels a day in 2017, IEA data show. The product now represents 6.5% of total consumption, up from 3.9% prior to 2003, analysts at Sanford C. Bernstein said in a note on Tuesday.

If China’s air traffic falls by half in the first quarter, this would equate to the loss of 300,000 barrels a day of demand compared with the previous year, according to a Barclays Capital note.

The epidemic isn’t only playing out in the market for aviation fuel. Two measures of diesel demand that traders watch closely—its premium against crude, and a gauge of supply and demand—have collapsed this year as fears of the coronavirus exacerbate weaker-than-expected consumption. Oil refiners were making $9.83 a barrel from turning crude oil into diesel on Monday, the lowest in almost two years, ICE Futures Europe data show.

Could traders be overreacting? In 2003, demand for gasoil/diesel fuel and naphtha, which is used to make petrochemicals, grew by 10% and 12% respectively, in line with annual trends at that time. The current virus drove crude lower for five consecutive days to Monday, but prices have gained since then as traders assess China’s efforts to contain the disease.

“While Chinese jet fuel demand sees a direct impact, the oil market seems to price in a much broader and longer lasting economic disruption than comparisons with earlier pandemics suggests,” Norbert Ruecker, head of economics and next-generation research at Julius Baer, said in a note on Tuesday.

Even the fears for jet fuel are overdone, said London-based consultant Energy Aspects Ltd. Aviation demand could make a strong recovery by the third quarter after dropping 5.6% year-on-year in the first, it said.

The situation in China is unfolding rapidly. It’s unclear if the outbreak will have a similar impact to SARS, or if drastic steps taken by the authorities—locking down cities with a combined population of 50 million people—will control the epidemic.

“Coronavirus could be more material” for the global oil market because China’s economy is so much bigger, said analysts at Sanford C. Bernstein. “Though early signs suggest a more effective response this time.”