China’s Oil Demand Declines Significantly

China, historically a key player in global oil demand, is now facing one of the most pronounced slowdowns in oil consumption seen in decades.

Slowest Growth in 15 Years

“China’s oil demand is growing at the slowest pace in the last 15 years (ex-COVID) with a decline of -2% year-to-date (YTD),” analysts from Bernstein noted in a report dated Thursday.

This decline is reflective of a broader economic slowdown in the country, as its previously thriving industrial and construction sectors have begun to weaken, exacerbating the drop in demand.

Year-on-Year Decline

According to data from China’s National Bureau of Statistics (NBS), oil demand dropped by 8% year-on-year in July, registering at 13.6 million barrels per day (MMbls/d), the lowest level since 2009 (excluding the COVID period).

From January to July 2024, China’s average oil demand was 14.3 MMbls/d, down by 0.3 MMbls/d or 2% year-on-year. This marks the first sustained decline in oil demand since 1990 (excluding the COVID downturn).

“China processed crude is down -6% year-on-year at 13.6 MMbls/d in July according to NBS data. The run rates at Shandong’s independent refineries are at 50% in July, compared to 63% last year,” the analysts reported.

Fuel Sales Drop

The notable decrease in domestic fuel sales, a key indicator of consumer-level demand for oil products, raises additional concerns. Major Chinese oil companies, such as PetroChina and Sinopec, have reported a 2% drop in fuel sales YTD.

This indicates weakened consumption of diesel, gasoline, and kerosene, with a further 6% year-on-year decline observed in the second quarter of FY24, hinting at continued sluggish demand.

Diesel consumption is down 4% YTD, closely linked to industrial and construction activity, signaling broader economic challenges. Conversely, gasoline consumption has remained relatively resilient, increasing by 7% YTD, although forecasts suggest it may plateau as electric vehicle (EV) adoption rises.

Increased EV penetration, now exceeding 50%, has led analysts to predict a peak in gasoline demand within the next five years. Kerosene demand, bolstered by a resurgence in air travel, saw a 19% YTD increase, while other oil products like naphtha, liquefied petroleum gas (LPG), and fuel oil experienced a 7% decline.

Seaborne Oil Imports Down

Real-time data on seaborne oil imports also reflects weakness. In August, China’s seaborne oil imports decreased by 9% year-on-year to 10.0 MMbls/d. For the year-to-date, imports have declined by 2%—consistent with falling domestic sales and refining activity trends.

“Based on current run rates and outlooks from companies, China’s oil demand could decrease by -2 to -4% (0.3-0.6 MMbls/d) in 2024, falling short of industry expectations,” analysts indicated.

Sinopec predicts that domestic fuel sales will drop by 3.7% year-on-year over the year, while refining throughput is expected to decline by 1.9%.

The International Energy Agency (IEA), which initially projected oil demand growth of 0.3 MMbls/d (+2% year-on-year), is likely to revise its expectations downward soon.

Structural Economic Challenges

This decline in oil demand is correlated with significant structural challenges within China’s economy, including a deceleration in the industrial sector, reduced property investments, and softer consumer spending.

The downturn in diesel and other heavy fuels mirrors broader economic trends, while the rise in gasoline demand could slow down as EVs capture a more considerable market share.

Bernstein’s analysis indicates that China’s oil demand is forecasted to peak within the next five years, with transportation fuel demands—gasoline and diesel—likely plateauing by 2025. By 2030, total oil demand in China is expected to reach its peak.

Despite ongoing growth in demand for petrochemical feedstocks, this increase will not be enough to counterbalance the decline in transportation fuels, which currently make up around 50% of China’s total oil consumption.

Global Market Implications

As China’s oil demand growth decelerates, the global oil market may also experience repercussions. In the past two decades, China has accounted for more than 50% of net global oil demand growth, meaning any slowdown or reversal in China’s demand trajectory could significantly impact oil prices.

“Without clear signs of a turnaround in China’s oil demand, oil prices are likely to trend downward in the latter half of 2024 and into 2025,” analysts said.

Prices have already started to decline due to several factors, including disappointing ISM data, diminished risks from Libyan oil disruptions, and, crucially, weaker demand from China.

Analysts at Bernstein assert that the “golden age” of China’s oil demand is coming to an end, a trend that will have lasting effects on global oil markets. While certain sectors like petrochemical feedstocks may continue to buoy demand, the overall outlook for China’s oil consumption suggests a trajectory of slowing growth and inevitable decline.