China learns to live on less fuel, to the relief of oil markets

[SINGAPORE/BEIJING] Three months into the Iran war, the oil market is coming to grips with an unexpected new reality: China, the world’s largest importer, needs much less fuel than previously thought.

Petrol sales at Sinopec, which runs China’s biggest network of petrol stations and is the world’s largest refiner, dropped 8 per cent on-year in April while diesel fell 6 per cent, according to industry sources briefed on internal data.

Fuel use in China had already been falling in recent years due to slowing economic growth and the rise of electric cars and trucks, but the recent decline is especially steep and has caught industry players by surprise.

Goldman Sachs estimates the drop in the use of petrol and related products was about 20 per cent in April, while China-basedGL Consulting put the decline at around 15 per cent. Unlike during the pandemic, it is not that Chinese are moving around less. Instead, they are changing the way they travel: rail journeys grew around 10 per cent in March and April annually, compared to around 5 per cent last year, according to Ministry of Transport data.

Travel by subway or taxis, which are electrified in many cities, is also growing rapidly, the data shows. China’s EV fleet, by far the world’s largest, also got more use in April. Charging rose 69 per cent from a year earlier to an all-time high, according to the state-backed China Charging Alliance.

The figures indicate that China can operate on less fuel than previously thought, which means less need for imported oil. About half of China’s crude oil consumption is refined into diesel or petrol. “It looks like consumers have made a quiet economic choice. Faced with higher petrol, diesel and airfare, many seem to have shifted away from oil-based transportation,” JP Morgan analysts wrote in late May.

China has cut crude imports drastically since the start of the war, in part by dipping into stockpiles built while prices were cheap, easing the crunch from the near-closure of the Strait of Hormuz and putting a lid on prices.

May oil imports slumped 29 per cent to their lowest in eight years at 7.8 million bpd, following a 20 per cent tumble in April. While those levels are unsustainable without China further tapping reserves, say analysts, the possibility that behavioural changes will persist and hasten the decline in fuel use has significant implications for global oil demand and a Chinese refining sector already facing overcapacity.

Petrol and diesel demand is now much more elastic in China thanks to EVs and the electrification and prevalence of mass transit, said S&P Global analyst Minmin Hu.

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“The drop in fuel consumption during the Covid period was due to mobility constraints,” she said. “The difference now is that demand is declining spontaneously.”

Diesel and the property crisis

Rising prices add to the decline in consumption for diesel caused by China’s five-year property sector crisis.

An independant fuel trader surnamed Zhang in Guangdong province said some local government-funded construction projects are struggling to fund diesel purchases for land-levelling as prices rise and Budgets tighten.

His company’s diesel and petrol sales have halved in the past few months, he told Reuters. Another fuel trader in China’s southwest, surnamed Song, said demand from logistics, mining and industry had dropped considerably while many construction clients had “disappeared entirely,” having already swapped their diesel trucks for electrics.

Will it last?

Sinopec expects national demand for petrol, diesel and jet fuel to fall around 10 per cent on-year in the second and third quarters, according to an industry source briefed by Sinopec. They declined to be named as they were not authorised to speak to media. S&P told Reuters it expects a similar drop in the second quarter.

In February – before the war – the refiner forecast diesel and petrol use would fall this year by 6 per cent and 5 per cent, respectively. Sinopec did not immediately respond to questions about its forecasts.

EV use continues to grow. The transport ministry said about a quarter of all vehicles on highways over the May Day holidays were electric or hybrids, a third more than last year.

Ride-sharing company Didi told Reuters half its car rental bookings during the May holiday were for electrics or hybrids, just over double the number over the same period last year.

“The open question remains whether any of this is permanent,” Rystad said in a note. “Our reading is that for petrol, at least part of it is.” REUTERS