The declining consumption of diesel in China, driven by the increasing adoption of LNG-powered trucks, is having a negative impact on domestic fuel demand. Forecasters are cautioning about additional risks stemming from the sluggish economy, which is being hindered by the protracted crisis in the real estate sector.

The world's second-largest economy has long been the driving force behind global oil demand, but as the country's appetite for transport fuel slows down due to an energy transition and a struggling economy, it is now affecting world markets.

In the second quarter, global oil demand growth was at its slowest since late 2022, mainly due to a decrease in Chinese consumption, as reported by the IEA's July oil market report.

Weak demand from manufacturing and construction is expected to continue in the second half, as China deals with a stagnant real estate sector that holds about 70% of its household wealth, along with growing external risks.

China's manufacturing sector is also slowing down, especially as its export-led growth model is no longer sustainable, according to Zameer Yusof, principal middle distillates analyst at analytics firm Kpler.

As gasoline use levels off, oil demand growth in China is projected to slow to just under 3% in 2024, down from the previous decade's average of 4.6% and last year's rebound of 11.7% from three years of COVID-19 restrictions.

A Reuters survey found that four out of five analysts expect second-half diesel demand to decrease between 2% and 7% annually, ranging from 3.81 million to 4.67 million barrels per day (bpd).

This finding comes after China's oil consumption declined in the second quarter, leading its refiners to reduce fuel output and crude imports.

Consultant Xia Shiqing of Wood Mackenzie expects China's second-half diesel demand to fall about 2% to 3.93 million bpd, making it the most sluggish sector within oil demand in the second half, with significant displacement in the trucking sector.

The rise In LNG-powered trucks is eroding the demand for diesel, while the increasing sales of electric vehicles indicate that China’s demand for transportation fuel may be reaching its peak. Gasoline and diesel currently account for over 40% of the nation’s oil demand.

Since January, the International Energy Agency has been consistently revising down its 2024 oil product demand forecast for China. Consulting firms such as FGE and Kpler have also adjusted their demand projections downward.

Kpler now anticipates a 4% annual growth rate for diesel demand in the second half of the year, a reduction from their earlier forecast. They acknowledge the possibility of further downward revisions in the future.

In a client note, FGE analysts highlighted the lack of incentive for refiners to increase production due to persistently weak diesel demand and a slowdown in gasoline consumption, despite the conclusion of peak refinery maintenance.

The analysts emphasized that there is no urgent requirement for additional fuel supplies in the domestic market.

The diesel demand forecast for the second half of the year has been revised by FGE, indicating a year-on-year decline of 5%, compared to the previous estimate of a 1.2% decrease.

SHIFT TO LNG

The utilization of conventional fuels is experiencing a decline, as evidenced by a remarkable 307% increase in the sales of trucks powered by LNG, reaching 152,000 units last year, according to data from the Chinese information provider CV World.

The cost of an LNG-powered truck is approximately 80,000 yuan ($11,021) higher than that of a comparable diesel truck; however, research from Horizon Insights indicates that the savings on fuel can offset this additional cost within roughly 190 days.

Wood Mackenzie estimates that the fuel expense for an LNG heavy-duty truck is around 1.7 yuan per kilometer, which is lower than the diesel cost of 2.8 yuan per kilometer. Each LNG truck is said to replace 13 metric tons (equivalent to 97 barrels) of diesel annually, as reported by the consultancy.

Kpler projects that LNG will replace 140,000 barrels per day of diesel from May to December, while FGE anticipates a displacement of 110,000 to 120,000 barrels per day of diesel from LNG in both 2024 and 2025.

Analysts from the data intelligence firm ICIS predict that LNG-powered trucks could constitute nearly 10% of the heavy-duty truck fleet by the year 2025.

GASOLINE, JET FUEL

It is anticipated that gasoline demand, which constitutes approximately 20% of China’s oil consumption, will experience a modest increase in the latter half of the year, according to industry forecasts. This projection is made in light of the ongoing growth in electric vehicle sales.

Specifically, Rystad and Woodmac anticipate annual growth rates of 1.2% and 1%, respectively, resulting in daily demand volumes of 3.45 million barrels and 3.97 million barrels during the second half of the year. In contrast, FGE projects that demand will remain relatively stable during this period.

Longzhong anticipates a 3.52% decline in second-half demand compared to the previous year, projecting a total of 3.87 million barrels per day (bpd), largely influenced by electric vehicles (EVs) comprising nearly 40% of car sales in the second quarter. Mia Geng, head of oil analysis at FGE, stated, "Gasoline demand is nearing the end of its growth phase, with limited potential for increase starting next year," and she predicts that consumption will stabilize within the next 12 to 18 months.

The aviation fuel sector is expected to be the primary driver of growth in China's refined fuel consumption, fueled by a resurgence in travel demand, with analysts estimating an annual growth rate of 8% to 15%, resulting in consumption levels between 870,000 bpd and 1.04 million bpd in the latter half of the year.

Domestic flight numbers have already surpassed pre-pandemic levels by 10%, while international flights have rebounded to 75% of their previous capacity, according to Xia from WoodMac, who noted that second-half demand is projected to exceed 30,000 bpd compared to the same period in 2019.

Despite the introduction of various visa-free initiatives since December to boost inbound travel, foreign arrivals totaled only 14.6 million in the first half, as reported by online travel agency Trip.com. This indicates that bookings must more than double in the latter half to reach the 2019 total of 49.1 million international visitors.

Reflecting the subdued demand, Chinese refinery throughput in the first half decreased by 0.4% year-on-year to 360.09 million metric tons (14.44 million bpd), according to official statistics, with Sinopec, the largest refiner in Asia, reducing diesel production by 8.8% due to a 2.5% decline in domestic refined fuel sales.

FGE projects a reduction of 200,000 bpd in refinery runs for the second half, bringing the total to 14.7 million bpd, while Kpler forecasts an average crude intake of 15.9 million bpd from July to December, which is only slightly different from the 15.81 million bpd recorded in the same period last year.