Is China's oil demand nearing its peak?

Uncertainty over China's oil demand has become the most important bearish factor for oil. Whenever analysts cite price declines, it is due to uncertainty about Chinese demand, or potential confidence that this demand will not increase.

The major Asian countries, which are the world's largest oil importers, are extremely important to the oil market. Players in these markets may need to begin adapting to the idea that China will not continue to consume crude oil for much longer.

The latest imports of crude oil from China have disappointed many people who had made the above speculations. China's crude oil imports in July fell 12% from June, and 3% lower than imports in 2023/7. This figure spurred comments that the Chinese economy was slowing down and oil demand was also decelerating, as was usual, and international prices fell.

Further bearish news is that India overtook China to become the biggest buyer of Russian crude oil, and that amount approached 2.1 million barrels per day.

Along with oil import figures, China's economic data is fueling much of the demand anxiety that plagues traders and analysts. Slowing manufacturing growth and the real estate crisis are a pretty sure reason to worry about oil demand in China, known for its manufacturing industry and once booming real estate sector.

This uncertainty now seems to have reached its peak: Reuters columnist Clyde Russell raised the question this week whether China's demand has already peaked. Russell pointed out that China's crude oil imports last year hit a record high, and that many analysts and traders seem to think that this year's economic slowdown is temporary. Then, “What if that's not the case?” That raised the question.

It's easy to understand why many market participants think the drop in demand is temporary. As Mr. Russell pointed out, China's crude oil imports have been on an upward trend for 19 consecutive years, but they plummeted in 2020 and 2021 due to the lockdown due to the pandemic. It then began to recover, and last year it reached a record high of 11.29 million barrels per day.

What many oil bulls expected was China's post-pandemic recovery. At the end of the day, it is natural that countries that have continued to increase oil imports until now will return to this growth trend with the end of the lockdown. This group of market participants seems to have ignored other processes, such as the plight of the real estate industry after years of growth with government aid, and the slowing down of the manufacturing industry in the global economy where many major companies are still struggling to recover after the pandemic.

And of course, there's talk of electric cars. China has aimed to become a leader in electric vehicles, and it has actually succeeded. China is currently the world's largest EV market. Also, unlike the European EV market, where EVs, for example, are still struggling to compete with internal combustion locomotives, it is a market that continues to grow.

According to figures from market research firm Rho Motion quoted by Reuters at the beginning of this month, the sales volume of plug-in hybrid vehicles and battery electric vehicles is 0.85 million3000 units, accounting for more than 50% of car sales. The reason why Sinopec, a major state-owned petroleum company, predicted that China's oil demand would peak by 2027 was due to this upward trend in EV sales.

One reason why oil demand is expected to peak is that truck fuel is being replaced from diesel to liquefied natural gas. According to Wood McKenzie, since LNG is cheaper than diesel and burns cleanly, industrial machinery operators are changing, and last year, the decline in demand for diesel exceeded 0.2 million barrels per day.

Some of these factors that determine China's oil demand are consistent trends, such as the growth of EVs. Also, there are things decided by the market, such as replacing diesel with LNG. The moment LNG prices soar, the changeover will slow down. Also, due to manufacturing and real estate factors, it is unlikely that the deceleration will become permanent. However, considering that China is building excess production capacity in both sectors, the recovery may be more moderate than bulls expect.

What this means is that there is a possibility that China will not return to a route where crude oil consumption continues to increase. However, it is unrealistic to expect this to happen. China relies on imports for nearly 60% of its consumption, and China does not like to rely on imports. It makes sense to do everything possible to reduce this dependency by encouraging alternative energy. In other words, the peak of China's oil demand may have arrived, or it may be right around the corner, but it is only a matter of time before the peak comes. The sooner the market adjusts, the sooner we can begin to focus on other factors that determine world prices, such as supply.