Can Beijing’s Stimulus Save China’s Foundering Oil Demand?
Can Beijing’s Stimulus Save China’s Foundering Oil Demand?
Announced stimulus will support Chinese financial assets but is unlikely to meaningfully reverse the ongoing and acute collapse in domestic fuel consumption.
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Chinese petroleum consumption is abnormally weak in 2024, contracting for the past 5 months compared to last year, and, as of August, year-to-date demand is now very modestly lower than it averaged over the first 8 months of 2023.
Diesel, Fuel Oil, and other specialized industrial products are all firmly in contraction year over year and, on the consumer side, both Gasoline and Jet Fuel now appear to be flatlining; petrochemical feedstocks like Naphtha and LPG represent the only remaining islands of growth.
Yesterday’s announcement of stimulus from Beijing should help support domestic equity markets but aren’t big enough nor have the type of fiscal spending required to drive the kind of real activity rebound in construction services that would reverse ongoing weakness in fuel consumption.
Barring an increasingly improbable late-year recovery in Chinese activity, 2024 is heading toward the second average annual contraction in domestic petroleum demand in more than three decades.
Chinese petroleum consumption is abnormally weak this year, contracting compared to the same period in 2023 for the past 5 months. As I initially explored in China Sputtering, Chinese demand has weakened considerably through 2024 and year-over-year growth has turned negative. Demand began contracting in April at a pace of 300 kbpd y/y; but, given the high base effects of summer 2023 (see China’s High Demand Bar), that demand contraction accelerated to roughly 1 MMbpd in June and July. And there is little relief on the horizon: China’s demand contraction likely continued through the bulk of the third quarter with only a possibility of a reprieve in the fourth quarter on the back of weaker base effects from last year.
2024 is poised to witness the second average annual contraction in Chinese domestic petroleum demand in over three decades. Weak growth conditions have been driven by a combination of the downturn in Chinese real estate and associated construction industries; sluggish consumer activity; and direct substitution effects split between LNG-trucking for diesel and booming electric vehicle sales—now more than half of Chinese new purchases—for gasoline. Indeed, industrial fuels like diesel, fuel oil, and other more specialized products continue to feel the brunt of the declines while consumer and petrochemical-linked fuels (i.e., gasoline, jet fuel, petroleum gasses, and naphtha) maintain firmer support. Yesterday, the People’s Bank of China (PBoC) announced a suite of policies aimed at supporting the beleaguered Chinese economy; unfortunately, they’re unlikely to meaningfully move the needle on contracting Chinese consumption. To understand why, it’s important to fully appreciate the scale and breadth of deepening Chinese petroleum product demand weakness.