The Oil Industry Also Affected by COVID-19... Concerns Over Declining Petroleum Product Consumption

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] The refining industry, already struggling due to declining refining margins, is facing a double blow from the novel coronavirus (Wuhan pneumonia) outbreak.

According to the Korea National Oil Corporation on the 11th, the price of jet fuel (kerosene) was $62.97 per barrel the previous day, a sharp drop of 21.9% from $80.71 at the end of last year. In particular, on the 5th, jet fuel prices hit the lowest point this year at $62.74. The steep decline in jet fuel prices was largely due to a significant reduction in Korea-China flight routes caused by the novel coronavirus. Among the 99 Korea-China routes, 65 have been suspended or reduced.

Jet fuel is one of the major revenue sources for refiners. The proportion of petroleum products sold by refiners ranks third at 13.6%, following diesel (29.3%) and naphtha (24.9%). The problem lies not only in domestic jet fuel demand but also in jet fuel exports.

The volume of jet fuel exports ranks second after diesel (195.38 million barrels), at 115.48 million barrels. China (14.99 million barrels) ranked third among the top jet fuel export countries last year, following the United States (44.21 million barrels) and Australia (15.48 million barrels).

An industry insider said, "During the 2003 SARS outbreak, Asia's air travel demand decreased by 45% over five months from the alert issuance to its lifting," adding, "Although not precisely calculated, jet fuel consumption is expected to decline due to reduced air travel demand."

The refining industry is concerned about the prolonged outbreak of the novel coronavirus. Economic downturns could reduce consumption not only of jet fuel but also of gasoline and diesel products. Diesel is the best-selling petroleum product, and gasoline (13.4%) sells as much as jet fuel.

For example, during the peak of SARS infections in February 2003, gasoline consumption decreased by 10.14% compared to the previous year. Consumption continued to shrink in March (-20.08%) and April (-5.90%), with a slight decrease in July (-3.48%). Diesel consumption also declined by 17.51% in February 2003, 7.57% in March, and 5.01% in April.

China's reduced petroleum product consumption is also a concern. China is the second-largest petroleum consumer after the United States (20.5%), accounting for 13.6% of global petroleum demand. It is reported that China's daily crude oil consumption has decreased by 3 million barrels (20%) due to the novel coronavirus outbreak. In response, the Organization of the Petroleum Exporting Countries (OPEC) is considering production cuts of 500,000 to 1 million barrels per day to defend against falling international oil prices caused by reduced Chinese crude consumption.

A representative from the Korea Petroleum Association said, "Refiners were already struggling last year due to shrinking refining margin spreads caused by the US-China trade dispute, and the novel coronavirus outbreak has increased uncertainty," adding, "If the situation prolongs, it could affect first-quarter earnings this year."