The new coronavirus sweeping China has curtailed air travel as a slew of airlines halted flights to and from the nation forcing refiners to cut runs and tweak yields to prevent a jet fuel glut amid a shrinking export market, industry sources said.

Estimates for the drop in jet fuel demand --the transportation fuel to bear the brunt of the virus outbreak that has led to the lock down of over 40 million people in China-- range from 300,000 barrels a day (b/d) to 400,000 b/d during the peak of the epidemic based on the 2003 SARS outbreak, they said.

IHS Markit expects refiners in China to cut runs drastically in February, amounting to 2.1 million b/d or about 28% of current crude throughput of around 13-14 million b/d. Refiners elsewhere in northeast Asia, including Taiwan, have also reduced throughput.

"The run cuts in China will help buffer some impacts from lower domestic demand, and provide some support to the refining margins in the next couple of weeks," said Matthew Chew, principal researcher at IHS Markit in Singapore.

"China's jet fuel demand was hit hard by the SARS epidemic, falling by 40%, or roughly 80,000 b/d at its low point. At the time, total Chinese jet fuel demand was about 200,000 b/d," IHS Markit said in an Oil Market Briefing dated Jan. 29.

"Before the Wuhan breakout, China's jet fuel demand was about 1 million b/d," they said in the note.

Industry sources said that aside from the run cuts, refiners will have to tweak yields to reduce jet fuel output in favor of diesel or naphtha depending on their crude slate and refinery configuration to keep margins profitable.

The jet fuel crack, or margin, fell to a more than three-year low at $8.64/bbl on Monday, according to data from IHS Markit OPIS. This is the smallest since Aug. 26, 2016, when the crack sank to $8.08/bbl.

Similarly, the jet fuel to gas oil spread, or regrade, sank to $2.45/bbl in favor of gas oil on Monday. That's the lowest since early 2018 when the gas oil, or diesel, specification was lowered to 10 parts per million (ppm) of sulfur compared with jet fuel, which has 4,000 ppm.

Boosting naphtha output might be a more palatable option given better petrochemical demand over transportation fuels amid a string of refinery maintenance in the Middle East that will reduce first quarter naphtha exports to East Asia, they said.

Refiners in northeast Asia may have little choice but to trim output as their export market is also shrinking due to the cutback in flights.

Airlines, particularly those plying long-haul routes from Europe and the U.S., have cut flights in and out of China since at least end January with some canceling flights into April. The list of carriers include Delta Air Lines, American Airlines, British Airways, Turkish Airlines, Qatar Airways and Qantas.

These cancellations also have the knock-on effect of curtailing jet fuel demand at the other leg of the flight to China leading to stockpile build in some key export locations, the sources said.

Consequently, exports from East Asia to important overseas markets such as the USWC and Europe have slowed.

Shipping fixtures show one medium-range (MR) tanker that's been booked to load in February after at least two charters were failed. The Marlin Ammolite is still in South Korea loading its cargo and is bound for the USWC, according to IHS Markit ship tracker.

Valero, which chartered the Marlin Ammolite, is the biggest mover of jet fuel from East Asia to the USWC. This booking is the only fixed charter any company has made for February loading barrels so far, the fixture lists show.

For January cargoes, Valero had booked five MR tankers while CCI chartered two MRs, NAFCO had one and Vitol booked an LR1 to load 65,000 mt, according to fixture lists.

--Reporting by John Koh, John.Koh@ihsmarkit.com

--Reporting by Raj Rajendran, Rajendran.Ramasamy@ihsmarkit.com

--Editing by Carrie Ho, Carrie.Ho@ihsmarkit.com

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