ANALYSIS-After decades, China sputters as engine of global oil demand growth

By Siyi Liu and Chen Aizhu

SINGAPORE, Dec 3 (Reuters) - China's crude oil imports are on track to peak as soon as next year as transport fuel demand begins to decline for the world's top crude buyer, ending the country's decades-long run as the dominant driver of expanding oil consumption.

The speed of its transition to electric mobility has stunned oil producers and investors. No single market is positioned to replace Chinese demand, which has made up 41% of annual global oil consumption growth averaging 1.1 million barrels per day (bpd) over the past three decades, according to the Statistical Review of World Energy.

EV and hybrid sales in China topped combustion engine vehicle sales for the first time in July, eating into China's need to import crude for refiners to make gasoline, with prolonged economic weakness also slowing overall oil consumption.

Demand for transportation fuels began to decline this year in a three-year plateau that started in 2023, said Ciaran Healy, demand analyst at the International Energy Agency, a view echoing a Chinese oil researcher's. The plateau has come around two years earlier than the 2025-2027 period the IEA forecast as recently as June, Healy told Reuters.

As a result, producers and investors face the prospect that Chinese crude imports are nearing their peak, with only China's expanding petrochemicals sector poised to underpin oil consumption in coming years.

"The oil industry is sort of figuring it out," said Martijn Rats, chief commodity strategist at Morgan Stanley.

He expects jet fuel and petrochemicals to drive Chinese oil demand growth at about 100,000-200,000 bpd annually in coming years, far below the long-term trend.

"Other countries are picking up the slack a little bit, but the incoming data is such that they're not offsetting the deceleration that we've seen in China," said Rats.

"If China doesn't grow at its historical trend rate, then it's very unlikely that the world will grow at its historical trend rate," he said.

While China's crude imports are set for a November bounce, they fell 3.4% annually in the first 10 months of 2024, a rare and steep decline surpassed only by the pandemic-triggered 7.2% drop for the same period in 2021.

That has hit crude prices, which have traded for most of the year in the $70-$80 per barrel range despite conflict in the Middle East and Ukraine, frustrating plans by OPEC to boost supply and driving four consecutive downward revisions in the producer group's 2024 demand growth forecasts.

FUEL PEAKS

In addition to the rise in EVs and an economic slowdown as China grapples with a property sector crisis, the replacement of diesel trucks by cheaper gas-fired vehicles is also stalling diesel consumption.

Jet fuel demand continues to grow, but not enough to offset erosion in gasoline and diesel use, even as Chinese refiners plan to start up new plants next year.

With combined demand for transport fuels peaking and low refining margins, China's refinery sector, long plagued by overcapacity, is set for an accelerating consolidation.

The speed of change in China's oil markets has led to widely varying forecasts for when fuel and crude demand will peak.

Consultancy FGE predicts China's crude imports may peak next year at 11.2 million bpd, on par with the record set in 2023 and 440,000 bpd above levels in the first 10 months of 2024.

Energy Aspects said China's crude imports may grow 500,000 bpd between 2024 and 2026 as new refining capacity comes online, an average 250,000-bpd annual increase, with slim growth beyond that.

The outlook for diesel demand, which accounts for over 20% of China's oil use, is a key swing factor.

FGE believes China's diesel demand peaked in 2022, while the IEA said in November it peaked in 2023 at 3.7 million bpd, and S&P Commodity Insights sees the crest coming in 2027, at slightly over 4 million bpd.

Gasoline, another major oil product, will peak this year, according to IEA, Energy Aspects and Rystad Energy forecasts, as consumers embrace EVs and plug-in hybrids.

PETCHEM PIVOT

With fuel demand peaking, petrochemicals are set to be the main engine driving any medium-term oil demand growth, with China poised to raise imports of feedstocks LPG and ethane to plug a domestic supply gap, according to the IEA.

The peak in China's total oil liquid demand, including naphtha, LPG and fuel oil, will come towards 2030, driven by petrochemical production, analysts said.

China became the largest maker of polymers during the pandemic years after big investments by private firms such as Rongsheng and Hengli Group and state refiners Sinopec and PetroChina pushing to boost self-sufficiency in petrochemicals.

The IEA expects China's total oil demand to peak around the end of the decade at 18.1 million bpd, 1.5 million bpd higher than in 2023, with growth at 2.7% per year from 2023 to 2025 before slowing to 0.6% a year between 2026 and 2030.

China will account for just 108,000 bpd of this year's global demand growth of 936,000 bpd - far below China's typical 40% share of liquids demand growth in the five years before 2020, Rystad Energy said in a recent note.

Although Beijing's recent stimulus has lent support to oil prices, analysts and industry insiders downplay expectations of a significant demand boost.

"Gasoline and diesel are dead as EVs grow at a surprisingly fast pace and there's more replacement by LNG," said a trader at an independent Chinese refiner, declining to be named as he was not authorised to speak with media.

"We are doing more on the petrochemical side given the growing demand, but as everybody rushes in, that prospect isn't looking good either."

(Reporting by Siyi Liu and Chen Aizhu in Singapore; Additional reporting by Florence Tan; Editing by Tony Munroe and Sonali Paul)

((siyi.liu@thomsonreuters.com;))