How weak is Chinese oil demand? Via Investing.com

Investing.com — China, long a driver of global demand, is now experiencing one of the sharpest slowdowns in oil consumption in decades.

“China’s oil demand grows at slowest pace in 15 years (ex-COVID), down -2% YTD,” Bernstein analysts said in a note dated Thursday.

This is part of a wider economic slowdown in the country, where the previously booming industrial and construction sectors have weakened, further contributing to lower demand.

Data from China’s National Bureau of Statistics (NBS) report that demand fell 8% year-on-year in July to 13.6 million barrels per day (MMbls/d), the lowest figure since 2009 (excluding the period COVID).

From January to July 2024, China’s average oil demand was 14.3 Mbl/d, down 0.3 Mbl/d or 2% y/y. This marks the first time China has experienced a sustained decline in oil demand since 1990 (excluding the COVID recession).

“China’s processed crude fell -6% y-o-y to 13.6 million bpd in July, according to China’s National Bank of China data. China’s Shangdong stand-alone refinery run rates at 50% in July (63% last year),” analysts said.

These lower run rates signal the struggling state of China’s refining industry, further reflecting weak domestic demand for refined products.

Declining domestic fuel sales – an important indicator of consumer demand for petroleum products – is another worrying trend. Reports from Chinese oil majors PetroChina and Sinopec (OTC: ) show a 2% drop in fuel sales YTD.

This reflects reduced consumption of diesel, petrol and kerosene. In the second quarter of FY24, domestic fuel sales deteriorated further, down 6% year-on-year, indicating a continued slowdown in demand.

The decline is strong in diesel consumption, which is down 4% YTD. Diesel is closely linked to industrial and construction activity, and its decline signals a broader economic slowdown.

On the other hand, gasoline consumption remained resilient, rising 7% at the start of last year, although it is expected to decline as electric vehicle (EV) adoption accelerates.

Electric vehicle penetration has now surpassed 50%, leading analysts to predict a peak in gasoline demand in the next five years. Kerosene demand, driven by a rebound in air travel, rose 19% YTD, but other petroleum products, including naphtha, liquefied petroleum gas (LPG) and fuel oil, fell 7% YTD.

Real-time data on oil imports by sea paints an equally bleak picture. China’s seaborne oil imports fell 9% in August to 10.0 Mbl/d. For the year to date, seaborne oil imports have fallen 2%, which is in line with declining demand trends seen in domestic sales and refining activity.

“Based on current operating rates and the company’s outlook, China’s oil demand could decline by -2 to -4% (0.3-0.6 mn/d) in 2024, which is below industry expectations ”, the analysts said.

Sinopec, the country’s biggest refiner, expects domestic fuel sales to fall 3.7 percent from last year, while refining output will fall 1.9 percent.

The International Energy Agency (IEA), which initially forecast oil demand growth of 0.3 Mbl/d (+2% y/y), is likely to revise its outlook downward in the coming months.

The decline in oil demand coincides with China’s economy experiencing structural challenges such as a slowdown in the industrial sector, reduced real estate investment and reduced consumer spending.

Weaker demand for diesel and other heavy fuels is notable because it reflects broader economic trends, while demand growth for gasoline may slow as electric vehicles continue to capture more market share.

Bernstein’s analysis indicates that China’s oil demand is likely to peak in the next five years. Demand for transportation fuels – gasoline and diesel – is likely to level off by 2025 as electric vehicle adoption increases, and by 2030, China’s total oil demand is expected to peak.

While demand for petrochemical feedstocks is projected to continue to grow, it will not be enough to offset the decline in transportation fuels, which currently account for about 50% of China’s total oil consumption.

As China’s oil demand growth slows, the global oil market is likely to feel the effects. Over the past two decades, China has accounted for more than 50% of the net growth in global oil demand, so a slowdown or reversal in China’s demand trajectory could have significant implications for oil prices.

“With no clear signs of a turnaround in Chinese oil demand, oil prices are likely to be lower in 2H24 and into 2025,” the analysts said.

Oil prices sold off in response to various factors, including weaker-than-expected ISM data, reduced risks from oil disruptions in Libya and, more importantly, weaker Chinese demand.

Bernstein analysts believe the “golden age” of China’s oil demand is coming to an end, and this will have lasting implications for global oil markets.

While some sectors, such as petrochemical raw materials, may continue to support demand, the overall outlook for China’s oil consumption is one of slowing growth and eventual decline.