For the past two decades, China's relentless rise has cemented its status as a key player in the global oil market, accounting for a significant portion of the world’s demand growthHowever, as the nation transitions toward electric vehicles (EVs), concerns are mounting among energy professionals that Chinese oil consumption may be approaching a pivotal momentThis shift raises critical questions about the future trajectory of global oil demand and the implications for energy markets worldwide.

China has long been the world's largest crude oil importerIn 2023, the country contributed to 16% of the global oil demand, equating to approximately 16.4 million barrels per day, an impressive increase from around 9% in 2008. Notably, during this period, China accounted for over half of the increase in global oil demandThis trend highlighted China's role as the primary engine driving oil demand around the globe.

However, the narrative began to shift dramatically in the wake of China’s abandonment of stringent COVID-19 restrictions in 2023, which initially led to a surge in oil consumption

Since then, the growth in demand seems to be slowing downAccording to forecasts from the International Energy Agency (IEA), the projected year-on-year increase in oil consumption for China in 2024 is merely 0.8%, with 2025 expected to see even less robust growth at just 1.3%. These figures indicate a stark departure from the rapid expansion seen in prior years.

While overall oil demand in China appears stable, it is undergoing significant internal shiftsNotably, gasoline and diesel consumption appears to be plateauingThe IEA estimates that by 2024, China’s demand for these transportation fuels will drop by 3.6% when compared to 2021 levelsThis change can be attributed in part to a slowdown in construction, which has reduced the need for diesel in machinery, but a more profound factor lies in the transformation of public transport and private mobility choices, notably the meteoric rise of electric vehicles.

Data from the China Passenger Car Association reveals that over half of all passenger vehicles sold in recent months were new energy vehicles, including plug-in hybrids

The IEA predicts that the demand for gasoline will decrease by 6.4% from its peak in 2021 due to this trendFurthermore, the advent of newer heavy-duty trucks that increasingly utilize liquefied natural gas (LNG) as opposed to diesel fuels this decline—projected diesel and gasoline usage is expected to fall to 44% of total oil demand by 2024, down from 51% in 2018.

This decline in transportation fuel demand comes amidst an uptick in the petrochemical sector, which is propping up oil product consumption to some degreeThe demand for naphtha, ethane, and liquefied petroleum gas—key inputs for petrochemical products—has surged by 59% between 2019 and 2024. However, as electric vehicles gain a broader market foothold, the sustained growth of the petrochemical sector may not compensate for the ongoing downturn in diesel and gasoline demand.

According to Martijn Rats, the Chief Commodity Strategist at Morgan Stanley, aviation fuels and petrochemical products might only see a modest increase in China’s oil demand, growing by about 100,000 to 200,000 barrels per day each year in the coming years—significantly below long-term trends

The implication of this scenario is troubling: “Other countries may try to make up the difference, but current data suggests they will not offset China’s slowdownIf China cannot maintain its previous growth pace, the entire world is unlikely to see significant demand growth either,” he warned.

From a supply perspective, it’s worth noting that China's refining capacities have surged by 42% from 2011 to 2023, reaching an impressive 18.5 million barrels per dayThis rapid increase poses challenges for large integrated oil companies globallyIn 2023, China’s daily oil imports averaged 11.3 million barrels, which accounts for over 10% of global productionThe structural decline in demand from China may exert downward pressure on upstream oil companies, making it difficult to maintain pricesThe excess refining capacity in China could also squeeze the margins of these oil giants, which had traditionally relied on these sectors for financial stability during periods of low oil prices.

This complex conundrum may be a significant reason why Wall Street investment firms currently view the outlook for the oil market in the coming year with skepticism

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A survey conducted among ten major industry banks revealed that seven hold pessimistic views regarding the oil market's prospects for next year.

Daniel Yergin, Vice Chairman of S&P Global, articulated the magnitude of this impending peak during a forum early in the year, stating that it is likely China's oil consumption will peak either next year or in the following four yearsThis marks a critical turning point in the demand side of the international oil market; the days when half of the world’s new oil demand originated from China are seemingly over.

In essence, China is witnessing a paradigm shift in its oil consumptionThe traditional role of oil as a primary transportation fuel is waning, as the focus shifts to energy security for transportation uses and the core of raw energy materialsProjections indicate that China's oil demand may peak around 2025, reaching 770 million tons, before dropping to approximately 240 million tons by 2060. This transformation will unquestionably have profound implications for global energy dynamics, as markets navigate the diminishing Chinese appetite for oil while grappling with the intricate interplay of supply and demand across the globe.