China continues to add uncertainty to oil consumption
China continues to add uncertainty to oil consumption
- For many years, China has been the main driver in the energy market, contributing to significant expansion in oil consumption
- However, in recent years, the country has reduced its dependence on oil through the electrification of its vehicle fleet and the expansion of use alternative energies.
- At the same time, the current crisis in the real estate sector in the country has also affected fuel consumption and added further uncertainty to the energy complex.
- Fiscal and monetary stimuli can help the economy, but they will not necessarily translate in a increase of fuel consumption, maintaining a bearish sentiment for energy commodities.
Introduction
In recent months, both bullish and bearish fundamentals have emerged in the oil market. Geopolitical tensions in the Middle East have added a risk premium to crude oil prices due to fears of disruptions in production and logistics in the region. However, concerns over energy demand and the perception of de-escalation in the conflict between Israel and Iran have resulted in a decline of over 5.8% (-$4.19) this week.
On the demand side, one of the most significant impacts is coming from China, where total imports in 2024 have dropped by more than 3 million barrels per day (-3.1%) compared to the previous year. This decline is primarily due to the electrification of the vehicle fleet and the current property crisis.
Due to its importance in the energy landscape, today’s report analyzes the fuel landscape in China and its impacts on global oil prices.
Image 1: China – Crude Oil Imports (b/d)
Source: Refinitiv
Image 2: China – Apparent Oil Demand (b/d)
Source: EIA
China's fuel consumption may not have much space to grow
In September, crude oil imports saw another year-over-year decline of 0.55%, falling by approximately 1 million barrels per day from the previous month. This decline has intensified the bearish sentiment in the energy market, where demand growth projections have been revised downwards revisions in recent months.
The country’s real estate crisis has contributed to a decline in total fuel consumption, as construction machinery relies heavily on diesel. Another significant factor has been the gradual shift from combustion-engine vehicles to electric vehicles, leading to a marked reduction in gasoline consumption.
Gasoline consumption is currently around 3.5 million bpd and may be nearing its peak (the maximum level that will be reached), adding further uncertainty about the additional demand the country may generate for the oil and derivatives market. Similarly, the growing use of LNG for trucks is also expected to bring diesel consumption, currently at 3.75 million bpd, to its peak.
Image 3: China – Apparent Demand for Select Refined Products (b/d)
Source: EIA
Economic stimuli could not translate into fuel consumption
Domestic demand for refined products has been a challenge for the country’s independent refineries, known as "teapots," which have been operating below 60% capacity since August. Unlike state-owned refineries, they produce lower-value-added products like bitumen. Due to decreased economic activity in the country, particularly impacting the construction sector, private refineries have been dealing with reduced margins, resulting in lower utilization of their facilities.
Although fiscal and monetary stimuli are welcome to support the economy, they may not necessarily translate into fuel consumption, resulting in the more bearish sentiment we have observed in energy commodities in recent weeks.
Therefore, the current fundamentals in the energy market in China may continue to create a scenario of uncertainty regarding fuel consumption, resulting in lower oil imports in the coming months.
Image 4: China – Refinery Utilization (%)
Source: Bloomberg
Summary
Weekly Report — Energy
victor.arduin@hedgepointglobal.com
laleska.moda@hedgepointglobal.com
