Analysis: China's Weak Diesel Consumption Squeezes Outlook for Oil Demand

(Reuters) — China's slumping consumption of diesel, as use of LNG-powered trucks grows, is weighing on domestic fuel demand, with forecasters warning of further risks from a sluggish economy hobbled by a prolonged crisis in the property sector.

While the world's second largest economy was long the growth engine for global oil demand, its peaking appetite for transport fuel, as an energy transition gathers pace in a sputtering economy, is now dampening world markets.

In the second quarter, global oil demand growth was its slowest since late 2022, driven by a contraction in Chinese consumption, the IEA's July oil market report showed.

Weak demand from manufacturing and construction is expected to persist in the second half as the world's top importer of oil grapples with a listless real estate sector that ties up about 70% of its household wealth, while external risks grow.

"China's manufacturing sector is starting to slow down - going by PMI figures - especially as its 'export-led' growth model is no longer tenable," said Zameer Yusof, principal middle distillates analyst at analytics firm Kpler.

"This is a function of both relatively slow worldwide economic growth, and also ongoing U.S. tariffs on Chinese goods."

As gasoline use plateaus, oil demand growth in the world's second-largest consumer is set to slow to just under 3% in 2024, analysts say, off the previous decade's average of 4.6% and last year's rebound of 11.7% from three years of COVID-19 curbs.

Four of five analysts in a Reuters survey said they expected second-half diesel demand to fall, between 2% and 7% on an annual basis, to range from 3.81 million to 4.67 million barrels per day (bpd).

The finding comes after China's oil consumption contracted in the second quarter, pushing its refiners to cut fuel output and imports of crude.

"Diesel demand is the most sluggish sector within oil demand in the second half, with significant displacement ... in the trucking sector," said consultant Xia Shiqing of Wood Mackenzie, which expects China's second-half diesel demand to fall about 2% to 3.93 million bpd.

As increasing numbers of LNG-powered trucks erode demand for diesel, accelerating sales of electric vehicles suggest China's demand for transport fuel is nearing its peak. Gasoline and diesel make up more than 40% of the country's oil demand.

The International Energy Agency has been revising down its 2024 oil product demand forecast for China every month since January, while consultancies such as FGE and Kpler have also trimmed some of their demand forecasts.

Kpler expects second-half diesel demand to grow by 4% annually, a downgrade from its previous forecast, adding that it may further cut its forecast in future.

In a note to clients, FGE analysts said, "Despite the end of peak refinery maintenance, persistently weak diesel demand and a slowdown in gasoline consumption provided little incentive for refiners to ramp up."

They added, "There is no pressing need for more supplies (of the fuels) in the domestic market."

FGE adjusted its diesel demand forecast downwards to a year on year decline of 5% in the second half, versus a drop of 1.2% earlier.

Shift to LNG

Conventional fuel use is slowing as sales of trucks running on LNG soared 307% to 152,000 last year, data from Chinese information provider CV World showed.

An LNG-fueled truck costs about 80,000 yuan ($11,021) more than a similarly-powered diesel truck, but fuel savings allow the expense to be recouped in about 190 days, research firm Horizon Insights said.

Woodmac estimates fuel for an LNG heavy-duty truck costs about 1.7 yuan a km, less than diesel's cost of 2.8 yuan. Each LNG truck displaces 13 metric tons (97 barrels) of annual diesel demand, the consultancy said.

Kpler estimates LNG will displace 140,000 bpd of diesel in the period from May to December, while FGE forecasts 110,000 bpd to 120,000 bpd of diesel displacement from LNG in both 2024 and 2025.

LNG-based trucks could make up nearly a tenth of the heavy-duty truck fleet by 2025, say analysts at data intelligence firm ICIS.

Gasoline, Jet Fuel

Gasoline demand, which accounts for a fifth of China's oil consumption, is expected to expand marginally in the second half, forecasts say, as EV sales continue to grow.

Rystad and Woodmac expect annual growth of 1.2% and 1% respectively, to 3.45 million bpd and 3.97 million bpd, in the second half, while FGE expects demand to stay flat.

Longzhong expects second-half demand to shrink 3.52% on the year to 3.87 million bpd, as EVs accounted for nearly 40% of car sales in the second quarter.

"Gasoline demand is now at the last leg of growth and upside is limited from next year," said Mia Geng, FGE's head of China oil analysis, who forecasts consumption to plateau within 12 to 18 months.

Aviation fuel is the main growth sector for China's refined fuel use, thanks to pent-up travel demand, with analysts forecasting on-year growth of 8% to 15%, to between 870,000 bpd to 1.04 million bpd, in the second half.

The number of domestic flights is already 10% higher than before the pandemic, while international flights have recovered to 75%, WoodMac's Xia said, adding that second-half demand should close 30,000 bpd higher than in the same 2019 period.

Although China has rolled out a raft of visa-free measures since December to further stimulate inbound travel demand, foreign arrivals stood at just 14.6 million in the first half, online travel agency Trip.com said.

That implies bookings must more than double in the second half to match 2019's figure of 49.1 million overseas visitors.

Reflecting weak demand, Chinese refinery throughput in the first half was down 0.4% on the year at 360.09 million metric tons (14.44 million bpd), official data showed, with Sinopec, Asia's largest refiner, cutting diesel output 8.8% as domestic sales of refined fuel fell 2.5%.

FGE expects refinery runs to drop 200,000 bpd annually in the second half to 14.7 million bpd, while Kpler forecasts crude intake averaging 15.9 million bpd from July to December, little changed from 15.81 million bpd a year earlier.

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