Key Takeaways:
Three months into the Iran war, the world's largest oil importer is consuming far less fuel than markets anticipated, easing a supply crisis that threatened to push crude past $120.
Three months into the Iran war, the oil market is confronting an unexpected reality: China, the world's largest crude importer, needs substantially less fuel than previously thought. Gasoline sales at Sinopec, which operates China's biggest network of petrol stations and is the world's largest refiner by capacity, dropped 8% on-year in April while diesel fell 6%, according to industry sources briefed on internal data.
"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 a late May note.
The demand destruction is steep and broad. Goldman Sachs estimates the drop in gasoline and related products reached about 20% in April, while China-based GL Consulting put the decline at around 15%. May crude imports slumped 29% to 7.79 million barrels per day, the lowest in eight years, following a 20% tumble in April. Pre-war import levels of around 11 million bpd were common before the conflict began Feb. 28.
The shift matters because China accounts for roughly half of global crude imports, and about half of its crude consumption is refined into gasoline or diesel. If the behavioral changes persist, the implications for global oil demand — and for a Chinese refining sector already facing overcapacity — are significant. Brent futures have moderated from a post-conflict high of $126.41 a barrel to trade near $93, with WTI crude settling above $90. Hedge funds increased their net-short stance on Brent to the highest since January in the week ended June 2, according to exchange data.
The EV Effect
Unlike during the pandemic, the decline is not driven by mobility restrictions. Rail journeys grew about 10% in March and April annually, compared with roughly 5% last year, according to Ministry of Transport data. Travel by subway or taxis, which are electrified in many cities, is also growing rapidly.
China's electric vehicle fleet, by far the world's largest, is getting heavier use. Charging volumes rose 69% from a year earlier in April to an all-time high, according to the state-backed China Charging Alliance. About a quarter of all vehicles on highways over the May Day holidays were electric or hybrids, a third more than last year, the transport ministry said. Ride-hailing company Didi told Reuters half its car rental bookings during the May holiday were for electrics or hybrids, more than double the number over the same period last year.
"The drop in fuel consumption during the COVID period was due to mobility constraints. The difference now is that demand is declining spontaneously," said Minmin Hu, an analyst at S&P Global.
Diesel and the Property Drag
Rising prices compound the decline in diesel consumption caused by China's five-year property sector crisis. An independent fuel trader in Guangdong province said some local government-funded construction projects are struggling to fund diesel purchases for land-leveling as prices rise and budgets tighten. His company's diesel and gasoline sales have halved in the past few months. Another fuel trader in China's southwest 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 now expects national demand for gasoline, diesel and jet fuel to fall about 10% on-year in the second and third quarters, according to an industry source briefed by the refiner. Before the war, Sinopec had forecast diesel and gasoline use would decline 6% and 5%, respectively, for the full year. S&P Global told Reuters it expects a similar 10% drop in the second quarter.
What Comes Next
The open question is whether the demand shift is permanent. Rystad Energy said in a note that for gasoline, at least part of it likely is. "Gasoline and diesel demand is now much more elastic in China thanks to EVs and the electrification and prevalence of mass transit," S&P's Hu said.
The demand destruction has provided a critical buffer for global oil markets during one of the greatest supply shocks in history. The Strait of Hormuz, which carried about a fifth of the world's crude in peacetime, has seen visible traffic estimated at just 15% of pre-war levels, according to JPMorgan. Clandestine flows of about 2.1 million barrels per day may have escaped the blockade, but the bigger factor keeping prices in check has been China's reduced appetite.
If Chinese fuel demand continues to decline at current rates, the world's top oil buyer may structurally need less crude even after the Strait of Hormuz reopens — a scenario that would reshape long-term demand forecasts and pressure OPEC's market management strategy.
This article is for informational purposes only and does not constitute investment advice.
