The rapid shift towards electric vehicles (EVs) has taken oil producers and investors by surprise. No other market is likely to compensate for the loss of Chinese demand, which has accounted for 41% of the annual increase in global oil consumption, averaging 1.1 million barrels per day over the last thirty years, as reported by the Statistical Review of World Energy.
In July, sales of electric and hybrid vehicles in China surpassed those of traditional combustion engine vehicles, reducing the country's reliance on crude imports for gasoline production. Additionally, ongoing economic challenges have contributed to a slowdown in overall oil consumption.
According to Ciaran Healy, a demand analyst at the International Energy Agency, transportation fuel demand has started to decline this year, following a plateau that began in 2023. This plateau has emerged approximately two years earlier than the IEA's previous forecast for 2025-2027, Healy informed Reuters.
Consequently, producers and investors are confronted with the reality that Chinese crude imports may be approaching their peak, with only the growth of China's petrochemicals sector expected to support oil consumption in the near future.
"The oil industry is adapting," stated Martijn Rats, chief commodity strategist at Morgan Stanley. He anticipates that jet fuel and petrochemicals will drive growth in Chinese oil demand by approximately 100,000-200,000 barrels per day in the coming years, significantly lower than historical trends.
"Other countries are somewhat compensating, but the incoming data indicates they are not fully offsetting the slowdown we are witnessing in China," Rats added.
China's growth trajectory is crucial for global economic performance, as noted by an expert who stated that if China does not maintain its historical growth rate, it is improbable that the world will achieve its usual growth rate.
In November, China's crude imports are expected to rebound, yet they experienced a 3.4% decline year-on-year during the first ten months of 2024, marking a significant drop only exceeded by the 7.2% decrease seen during the pandemic in 2021.
This decline has impacted crude oil prices, which have largely remained in the $70-$80 per barrel range throughout the year, despite ongoing conflicts in the Middle East and Ukraine. This situation has complicated OPEC's efforts to increase supply and has led to four consecutive downward adjustments in the group's demand growth projections for 2024.
FUEL PEAKS
The rise of electric vehicles (EVs) and an economic slowdown linked to a crisis in China's property sector are contributing to a stagnation in diesel consumption, further exacerbated by the transition from diesel trucks to more affordable gas-powered vehicles.
While demand for jet fuel is on the rise, it is insufficient to counterbalance the decline in gasoline and diesel consumption, even as Chinese refiners prepare to launch new facilities next year.
With overall demand for transportation fuels reaching its peak and refining margins remaining low, China's refinery sector, which has long struggled with overcapacity, is poised for a rapid consolidation.
The rapid evolution of China's oil markets has resulted in a wide range of predictions regarding the timing of peak fuel and crude demand.
Consultancy FGE anticipates that China's crude imports may reach a peak of 11.2 million barrels per day (bpd) next year, matching the record set in 2023 and exceeding the levels recorded in the first ten months of 2024 by 440,000 bpd.
Energy Aspects projects a growth of 500,000 bpd in China's crude imports from 2024 to 2026, averaging an annual increase of 250,000 bpd, with minimal growth expected thereafter.
The future of diesel demand, which constitutes over 20% of China's oil consumption, is a significant variable in this equation.
FGE posits that diesel demand in China peaked in 2022, while the International Energy Agency (IEA) indicated in November that it peaked in 2023 at 3.7 million bpd. In contrast, S&P Commodity Insights forecasts that the peak will occur in 2027, slightly exceeding 4 million bpd.
PETCHEM PIVOT
As fuel demand reaches its peak, petrochemicals are anticipated to be the primary driver of medium-term oil demand growth, with China expected to increase imports of feedstocks such as LPG and ethane to address a domestic supply shortfall, according to the IEA.
Analysts predict that China's total oil liquid demand, which includes naphtha, LPG, and fuel oil, will peak around 2030, largely fueled by petrochemical production.
During the pandemic, China emerged as the leading producer of polymers, thanks to substantial investments from private companies like Rongsheng and Hengli Group, as well as state-owned refiners Sinopec and PetroChina, all aiming to enhance self-sufficiency in the petrochemical sector.
The IEA forecasts that China's total oil demand will reach a peak of approximately 18.1 million bpd by the end of the decade, representing an increase of 1.5 million bpd compared to 2023. This growth is expected to average 2.7% annually from 2023 to 2025, before decelerating to 0.6% per year from 2026 to 2030.
This year, China is projected to contribute only 108,000 bpd to the global demand growth of 936,000 bpd, a stark contrast to its usual 40% share of liquids demand growth observed in the five years leading up to 2020, as noted by Rystad Energy.
While recent stimulus measures from Beijing have provided some support to oil prices, analysts and industry experts are cautious about the potential for a significant increase in demand.
"Gasoline and diesel are losing ground as electric vehicles proliferate rapidly and there is a shift towards LNG," remarked a trader from an independent Chinese refinery, who requested anonymity due to restrictions on media communication.
"We are focusing more on the petrochemical sector due to rising demand, but with so many players entering the market, the outlook is becoming less favorable."