CHINESE OIL DEMAND DOESN´T MAKE SENSE / THE WALL STREET JOURNAL

Chinese Oil Demand Doesn’t Make Sense

Global crude demand and prices could soon take a hit

By Nathaniel Taplin

Domestic air traffic in China has recovered more rapidly than highway transport, but it is a smaller portion of China’s total petroleum consumption. PHOTO: TYRONE SIU/REUTERS

China’s economy is having a rough summer, but the country is still churning out record amounts of diesel and importing vast amounts of crude oil. 

That imbalance is unlikely to persist forever.

Either China’s economy will accelerate rapidly in the second half—a prospect that currently looks unlikely—or oil demand will revert to more regular patterns, dragging global consumption and, potentially, prices down with it.

In early 2023, when the Chinese economy was still bouncing back rapidly after the end of pandemic-era lockdowns in December, fast oil demand growth looked perfectly natural. 

But in the second quarter, as China’s growth stumbled—particularly the property sector, which heavily impacts diesel demand—some curious patterns started to emerge.

China’s apparent petroleum demand—refinery runs plus net oil product imports—was up 25% and 17% year over year in April and May respectively, according to figures from data provider CEIC. 

Diesel production in May was 26% higher than a year earlier, and a full 40% higher than in May 2019 before the pandemic hit.

Given how bad things are right now in China’s property sector, that is an astonishing figure. 

Property investment in May was 21% lower than in May 2022. 

At the same time, highway transport remains lackluster. 

Freight turnover is still below late 2019 levels, and highway passenger transport turnover, in person-kilometer terms, is still less than half prepandemic levels. 

Domestic air traffic has recovered more rapidly but, as a portion of China’s total petroleum consumption, jet fuel remains small relative to diesel and gasoline.

There are several possible explanations, but the simplest one may be that Chinese refiners and regulators—like much of the world—misjudged both the strength of China’s recovery and the global energy market.

Chinese refiners need government permission to export fuels like diesel—part of China’s residual price controls. 

The first round of quotas for 2023 was nearly 50% higher than a year earlier, according to Reuters—presumably to help refiners take advantage of attractive global prices while Chinese demand was still in the doldrums. 

Net petroleum product exports in early 2023 were indeed very strong. 

But in the second quarter, they cratered. 

Diesel production kept roaring along, however, even with lower global prices and a smaller export quota from Beijing this spring.

Part of the reason may be price signals out of whack with the actual economy. 

Chinese regulators periodically adjust domestic fuel prices with a lag after global prices move. 

But over the last year, global oil prices have fallen significantly more than Chinese fuel prices. 

Brent oil prices are down about 33% since the end of June 2022, according to data from CEIC. 

But in dollar terms, domestic Chinese diesel prices are only down around 23%.

Chinese refiners—who had already cranked up diesel output in late 2022 for export—may have decided to keep production high in hopes of a big, property and infrastructure-driven demand boom at home in early 2023. 

With still high state-set fuel prices at home and falling crude prices globally, they would also have been in a position to reap some juicy margins. 

Unfortunately, the hoped-for demand surge now looks questionable.

China doesn’t regularly publish petroleum inventory data like the U.S. so it is difficult to say for sure how much diesel might be sitting in storage somewhere. 

At some point, though, refiners may need to capitulate to reality and dial down output, unless the government’s strategic reserve decides to step in.

When and if that happens, Chinese apparent oil demand could well take a hit, weighing further on global oil prices in late 2023.