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. Gasoline sales at Sinopec, which runs China’s biggest network of petrol stations and is the world’s largest refiner, dropped 8% on-year in April while diesel fell 6%, 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 gasoline and related products was about 20% in April, while China-basedGL Consulting put the decline at around 15%.
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% in March and April annually, compared to around 5% 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% 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 gasoline. “It looks like consumers have made a quiet economic choice. Faced with higher gasoline, 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% to their lowest in eight years at 7.8mn bpd, following a 20% 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.
Gasoline 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. “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.”
Rising prices add to the decline in consumption for diesel caused by China’s five-year property sector crisis.
An independent 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 gasoline 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.
Sinopec expects national demand for gasoline, diesel and jet fuel to fall around 10% 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.