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Uncertainty about Chinese oil demand has become the single most important bearish factor for oil. Every time analysts cite lower prices it is because of uncertainty about Chinese demand—or the potential certainty that this demand is not going higher.
As the world’s largest importer of oil, the Asian powerhouse has pretty understandable significance for oil markets. The players in those markets may need to start adapting to the idea that China will not continue to consume ever more crude oil far into the future.
The latest import figures for China and crude oil disappointed many of those who had made the above assumption. In July, China imported 12% less oil than it did in June and 3% less oil than it imported in July 2023. The figures, as usual, spurred comments that China’s economy was slowing down—and so was oil demand—and international prices fell.
In further potentially bearish news, India just surpassed China as the biggest buyer of sanctioned Russian crude at a rate of close to 2.1 million barrels daily, which represented a 4.2% monthly increase and a 12% annual increase.
Along with the oil import figures, economic data on China has fueled a lot of the demand uncertainty gripping traders and analysts alike. A slowdown in manufacturing growth and a real estate crisis are pretty solid reasons to worry about demand for oil in a country known for its manufacturing industry and once booming real estate sector.
It appears that this uncertainty has now reached its culmination: Reuters columnist Clyde Russell this week posed the question of whether China’s demand had not already peaked. Russell noted China’s record import rate for crude oil last year and the perception that most analysts and traders appear to believe that this year’s slowdown is a temporary thing. And then he asked the question: what if it isn’t?
It is easy to see why so many market participants expect the demand wobble to be a temporary problem. As Russell pointed out, China’s oil imports have been on a straight upward trajectory for 19 years in a row before plummeting in 2020 and 2021 because of the pandemic lockdowns. Then they started recovering, to reach an all-time high of 11.29 million barrels daily last year.
It was China’s post-pandemic recovery that many oil bulls pinned their hopes on. After all, it only made sense that the country that had been importing ever-growing volumes of oil would return to this growth trend after the end of the lockdowns. It appears this group of market players ignored other processes, such as the real estate industry’s troubles after years of growth on government steroids and the manufacturing slowdown in a global economy where many big players are still struggling to get back on their feet after the pandemic.
Then, of course, there is the electric vehicle story. China set out to become a leader in electric vehicles, and it did. The country is currently the biggest EV market in the world. And it is a market that continues to grow, unlike the EV market in Europe, for instance, where EVs are still struggling to compete with internal combustion engine cars.
This is not the case in China, where sales of plug-in hybrids and battery electric cars represented over 50% of all car sales, at a total of 853,000, per figures from market research company Rho Motion as cited by Reuters earlier this month. It was this trend in EV sales growth that prompted Sinopec, the state oil major, to predict that oil demand in China would peak before 2027.
A contributing factor to the expectation of peak oil demand is the replacement of diesel with liquefied natural gas as fuel in trucks. With LNG getting cheaper and burning more cleanly than diesel, industrial machinery operators are switching, with demand destruction for diesel topping 200,000 barrels daily last year, according to Wood Mackenzie.
Some of these factors that play a part in determining China’s oil demand are consistent trends, such as EV growth. Others are market-determined, such as the replacement of diesel with LNG. The moment LNG prices jump, the switch will slow down. There is also the manufacturing and real estate factor, where the slowdown is unlikely to be permanent. Yet, given the overcapacity that China has built in both sectors, the recovery may be more modest than bulls might hope.
What this means is that China may not return to its path of consuming ever-growing volumes of crude oil. To be fair, however, it was unrealistic to expect it would. China relies on imports for close to 60% of its consumption, and China doesn’t like to rely on imports so much. It makes sense to do everything to reduce this dependence by encouraging alternative energy solutions. In other words, China’s peak oil demand may be here, or it may be around the corner—but it is only a matter of time before that peak comes. The sooner the market adjusts, the sooner it could start paying attention to other factors determining global prices, such as supply.
