Since the beginning of the year, the optimistic expectations for the recovery of China's economy have significantly faded, with indicators in manufacturing, infrastructure, and other areas showing weakness. As a result, China's demand for fuel oil and other crude oil derivatives might peak this year. Some analysts state that, despite import data showing strong crude oil demand in China, most of the imported crude is allocated for reserves, not converting into actual gasoline and diesel demand.
Even as the major oil-producing nations' alliance Opec+ continues to maintain strict production restrictions, factors like China's lackluster economic recovery may limit the momentum for further increases in crude oil prices. Industry consulting firm Mysteel OilChem indicates that in addition to the limited demand in China, the emergence of new energy vehicles poses a continuous threat to future crude oil demand, potentially making it difficult for this year's diesel and gasoline consumption in China and globally to reach pre-pandemic levels.
Industry consulting firm FGE expects China's crude oil demand growth to slow down to 1.1 million barrels per day in the second half of the year, a noticeable decline from 1.3 million barrels per day in the first half. However, financial markets and industry figures suggest that, despite signs of weakening energy consumption in the short term, China's crude oil demand is still expected to maintain a steady growth momentum in the coming years.
Analyst Sun Jianan from Energy Aspects Ltd. anticipates that China's crude oil demand might reach a peak of 16.4 million barrels per day in the second quarter of this year, with demand dropping to 15.8 million barrels per day in the third quarter. However, due to seasonal factors and heating demand, China's crude oil demand might rise again to 16.2 million barrels per day in the fourth quarter. Additionally, Energy Aspects believes that China's crude oil demand will remain at 16 million barrels per day in 2024.
Diesel, a key fuel for the mining, logistics, and agriculture sectors, currently exhibits an even more noticeable weak demand. Data from intelligence companies Kpler and OilChem shows that with the weakening domestic diesel consumption, China has increased its commercial diesel inventories and expanded diesel exports. Detailed data reveals that by late July, China's diesel exports reached a high since March of 1.19 million tons per month, and diesel commercial inventories climbed to a three-month high.
China's crude oil imports exceeded 12 million barrels per day in May, and June's import volume even refreshed a three-year high, keeping some market participants optimistic about China's crude oil demand. However, according to Vortexa Ltd's analysis based on relevant data, China's on-road crude oil inventories have increased to a record 1.0 billion barrels, far exceeding the United States' several times reduced reserve of 347 million barrels. This indicates that China's imported crude oil might have filled inventories instead of converting into actual demand represented by diesel and gasoline consumption.
Meanwhile, China's crude oil processing industry presents a mixed situation. As of the end of July, the operation rate of China's state-owned refineries was slightly higher than 80% of capacity, 10 percentage points higher than the same period last year. However, the operation rate of China's independent refineries has decreased compared to the same period last year, with an operation rate only close to 60% of capacity.
Apart from the threat to crude oil demand posed by weak economic growth momentum, new energy vehicles are also challenging diesel and gasoline consumption. Data shows that compared to the same period last year, the sales of new energy vehicles (electric vehicles and plug-in hybrid vehicles) in China increased by 37% in the first half of this year, while the sales of internal combustion engine vehicles dropped by 8%.
Analysts at OilChem predict that China's consumption of gasoline and diesel this year can only reach 95% of the pre-pandemic level. However, Guo Zhaohui, an analyst at China International Capital Corporation, believes that while the consumption demand for gasoline and diesel may not grow much in the second half of the year, if refiners continue to replenish inventories, it could provide certain support for China's overall crude oil demand.
