China’s ongoing economic struggles and property crisis are significantly affecting global oil consumption and growth expectations this year, putting a cap on crude prices.
Despite a weekly gain in oil prices, market sentiment remains subdued due to the Chinese slowdown. This downturn persists even as prices received a boost from a 50 basis point cut by the Federal Reserve, geopolitical tensions, and low stock levels at Cushing, the main delivery point for NYMEX WTI futures. Ole Hansen, Head of Commodity Strategy at Saxo Bank, noted that Brent Crude‘s recent drop below $70 was short-lived.
Hansen pointed out that the market believes that sustaining prices below $70, combined with hedge funds showing a lack of confidence in future price increases, suggests a recession may be needed to justify such low levels. He indicated that the recent Fed rate cut has eased some of these recession concerns. However, worries about China’s economy remain and could persist in the medium to long term.
So far this year, China’s fuel consumption has fallen short of expectations due to sluggish economic growth and a continuing property crisis, which has particularly hurt diesel demand. Analysts suggest that China’s fuel demand may not improve in the near future. They predict that road fuel consumption could peak soon, if it hasn’t already, due to the rising popularity of electric vehicles (EVs) and an increased use of liquefied natural gas (LNG) in trucking.
OPEC has adjusted its oil demand growth forecast for 2024, citing these Chinese concerns. In its September Monthly Oil Market Report, OPEC now projects global oil demand to rise by 2.03 million barrels per day (bpd) next year, down from a previous estimate of 2.11 million bpd. The forecast for Chinese demand growth for 2024 has also been revised downwards from 700,000 bpd to 653,000 bpd. OPEC emphasized that challenges in the real estate sector and the growing use of LNG trucks and electric vehicles are likely to hinder future demand for diesel and gasoline.
Similarly, the International Energy Agency (IEA) has noted a significant slowdown in global oil demand growth, reducing its estimate to just 900,000 bpd in 2024, down by 70,000 bpd from last month. The IEA reported that in the first half of 2024, global oil demand grew by only 800,000 bpd compared to the previous year, marking the slowest growth since 2020.
The IEA attributes this sluggish growth mainly to a “rapidly slowing China,” where oil consumption fell for the fourth consecutive month in July, decreasing by 280,000 bpd year-on-year. The agency now forecasts China’s oil demand to expand by only 180,000 bpd in 2023, as a broad economic slowdown and a shift towards alternative fuels negatively impact consumption.
“Chinese oil demand is currently contracting, showing a 1.7% decline in July compared to the previous year, contrasting sharply with the 9.6% growth average in 2023. Therefore, we anticipate an annual growth of just 1.1%, or 180,000 bpd, in 2024,” the IEA stated.
Looking ahead, the IEA predicts that other emerging Asian economies, particularly India, will emerge as key drivers of global oil demand.
This perspective on a structural shift in Chinese oil demand is echoed by industry leaders. At the APPEC conference in Singapore, oil executives noted that China’s oil demand is declining due to weaker economic performance and a transition to electric vehicles and LNG-fueled trucks.
Russell Hardy, CEO of Vitol Group, the world’s largest independent oil trader, told Bloomberg earlier this month, “Gasoline demand in China is likely to peak this year or next, not because people are driving less, but because the vehicle fleet is gradually shifting to electric vehicles.”
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