Coronavirus driving oil's demand destruction

Phil Flynn

Oil's had a rough go over the last few weeks, mainly due to the raging coronavirus, but there is optimism a bottom may be near.

President Trump on Wednesday assured Americans that the "risk remains low" to the nation and that the U.S. is prepared to handle an outbreak while noting Vice President Mike Pence will assume oversight of the coronavirus task force.

TRUMP TAPS PENCE TO OVERSEE CORONAVIRUS TASK FORCE

When asked about the drop off airlines and other travel companies have seen as a result, he remained hopeful the businesses will rebound.

"This is going to end, hopefully, sooner rather than later and the business they lost will be picked up at a later date," said Trump in response to a question from FOX Business' Blake Burman.

So, it's not so much a question of if oil demand will turnaround, but rather more a matter of exactly when this will happen.

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The uncertainty means concerns about more demand destruction will remain.  Already at this point, the coronavirus has taken its toll on demand. Despite the response from the White House Wednesday, the CDC warning earlier this week did not help oil. Delta, United, and American are saying they will cancel more flights to China and will waive fees for travelers booked to South Korea through late April.

That has had a significant impact on jet fuel demand. About 80 percent of scheduled airline capacity to, from and within China, was cut last week has a considerable effect in jet fuel demand.

Reuters reported that China's aviation regulator said flights in the country that were suspended in the wake of the outbreak would resume gradually as factories and businesses reopen, but those to Hubei province, the virus's epicenter, will remain halted. China's refined oil product demand is expected to fall 35.7 percent in the first quarter compared to a year earlier, leading to a surplus of 27.08 million tonnes in the local market, said the research institute for China National Petroleum Corp (CNPC).

Now, if fear spreads faster than the virus, we could see even more demand destruction impact. Oil is the first to feel this. As factories closed and people fear to travel it will cut demand substellar. Yet despite this fear, we know that based on other demand destruction events, the request will come back.

It is not a question of if but when. In the past, it was only a matter of months. Maybe this time will be worse, but in these types of events, history is our best guide.

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