Uncertainty about Chinese oil demand has become the main bearish factor for oil prices. Whenever analysts talk about lower prices, it is because of uncertainty about Chinese demand – or the potential certainty that this demand will not increase.
As the world’s largest oil importer, the Asian energy company has understandable importance for oil markets. Players in these markets may have to get used to the idea that China will not continue to consume more crude oil in the future.
The latest import figures for China and crude oil disappointed many of those who made the above assumption. In July, China imported 12% less oil than in June and 3% less oil than in July 2023. The figures, as usual, led to comments that China’s economy was slowing – and with it oil demand – and international prices were falling.
More potentially pessimistic news: India exceeded China is the largest buyer of sanctioned Russian crude oil, at a rate of nearly 2.1 million barrels per day, up 4.2 percent month-on-month and 12 percent year-on-year.
In addition to the oil import figures, economic data from China has also added to demand uncertainty among traders and analysts. A slowdown in production growth and a housing crisis are pretty good reasons to worry about oil demand in a country known for its manufacturing industry and once-booming real estate sector.
It seems that this uncertainty has now reached its peak: Reuters columnist Clyde Russell this week placed the question of whether China’s demand hasn’t already peaked. Russell pointed to China’s record import rate of crude oil last year and the view that most analysts and traders seem to believe that this year’s slowdown is only temporary. And then he asked: What if it isn’t?
It’s easy to understand why so many market participants believe the demand weakness is a temporary problem. As Russell pointed out, China’s oil imports were on a straight upward trajectory for 19 consecutive years before collapsing in 2020 and 2021 due to pandemic-related lockdowns. Then they began to recover, reaching a historic high of 11.29 million barrels per day last year.
Many oil bulls pinned their hopes on China’s post-pandemic recovery. After all, it was only logical that the country, which had been importing ever-increasing amounts of oil, would return to this growth trend once the lockdowns ended. It seems that this group of market participants ignored other processes, such as the problems of the real estate industry after years of growth thanks to government support and the decline in production in a global economy where many major players are still struggling to get back on their feet after the pandemic.
And then, of course, there is the story of electric vehicles. China set out to become a leader in electric vehicles, and it has done so. The country is currently the largest market for electric vehicles in the world. And this market continues to grow, unlike the electric vehicle market in Europe, for example, where electric vehicles still struggle to compete with vehicles with combustion engines.
This is not the case in China, where sales of plug-in hybrids and battery-powered electric cars accounted for over 50% of all car sales, with a total of 853,000 vehicles, according to market research firm Rho Motion. quoted by Reuters earlier this month. It was this trend in EV sales growth that prompted Sinopec, the state-owned oil company, to predict that oil demand in China would peak before 2027.
One factor contributing to the expectation of a peak in oil demand is the Substitute Diesel is being replaced by liquefied natural gas as fuel in trucks. As LNG becomes cheaper and burns cleaner than diesel, industrial machine operators are switching. According to Wood Mackenzie, demand for diesel last year was over 200,000 barrels per day.
Some of these factors driving China’s oil demand are consistent trends, such as the growth in electric vehicles. Others are market-driven, such as the replacement of diesel with LNG. Once LNG prices rise, the transition will slow. Then there are factors like the manufacturing and real estate sectors, where the slowdown is unlikely to last. But given the excess capacity China has built in both sectors, the recovery could be more modest than bulls hope.
This means that China may not return to its old course of ever-increasing crude oil consumption. But, frankly, it was unrealistic to expect this. China depends on imports for nearly 60% of its consumption, and China is not that reliant on imports. It makes sense to do everything possible to reduce this dependence by promoting alternative energy solutions. In other words, China’s oil demand may have peaked or may be about to – but it is only a matter of time before that peak is reached. The faster the market adjusts, the sooner it could start to pay attention to other factors that determine global prices, such as supply.
By Irina Slav for Oilprice.com
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