Amin Nasser, the top of Saudi Aramco, the world’s largest oil firm, has all the time had one particular buyer: China.
In his 10 years in cost, Nasser has seen the worth of Saudi oil exports to China greater than triple, to a file $56bn in 2022, a yr during which nearly one in six barrels that Saudi Arabia pumped was shipped to Chinese language refineries.
Overseas oil has underpinned China’s financial rise, because the nation constructed the world’s largest automobile trade from scratch, new railways and air journey networks, and hundreds of skyscrapers. In 2022, 72 per cent of its complete crude oil provide was imported, in accordance with the Worldwide Vitality Company (IEA).
“I have no doubt that elevating our relationship to undreamed-of heights would help turbo-charge China’s efforts to meet the hopes and dreams of its people,” mentioned Nasser ultimately yr’s China Improvement Discussion board in Beijing.
However there are actually indicators that China’s thirst for crude is reaching a peak ahead of anticipated, a improvement that has despatched shockwaves via the oil market.
The top of the Chinese language supercycle
That is the second of a two-part sequence on how Chinese language demand for commodities, which remodeled the mining and power industries for 20 years, is now starting to weaken, partially due to the property disaster
Half one: The China commodities supercycle is over. Will there be one other?
This week, China mentioned its oil imports had fallen practically 2 per cent, or 240,000 barrels a day, to only over 11mn b/d in 2024 in contrast with the yr earlier than, the primary decline in 20 years barring the disruption throughout the Covid pandemic.
China’s stuttering financial system is partly guilty. The nation’s ongoing property disaster led to a slowdown in building, which hit demand for diesel to run heavy equipment, in addition to for the petrochemicals utilized in paint, pipes and insulation.
However the decline stems from longer-term tendencies too. There was a increase in vehicles switching from diesel to liquefied pure gasoline, and, most significantly, the rising variety of electrical autos helped to depress gross sales of petrol and diesel.
Gross sales of each street fuels peaked in 2023, in accordance with China Nationwide Petroleum Corp, and can now fall by 25-40 per cent over the subsequent decade.
In December, Sinopec, China’s greatest refiner, introduced ahead its forecast for crude oil consumption to achieve a peak to 2027, in contrast with the vary it beforehand gave of between 2026 and 2030.
The implications of China hitting peak oil are monumental. If Chinese language demand is reaching a plateau that will fulfil projections by the IEA of worldwide oil demand peaking earlier than 2030. The forecast sustains hope for the world to achieve web zero carbon emissions by 2050.
The milestone would additionally shake the worldwide financial system. Over the previous three a long time, China has accounted for half of all progress on this planet’s oil demand — some 600,000 b/d.
If that charge continues to degree off, the $500bn that oil corporations are spending yearly on discovering new sources of oil and gasoline could also be far too excessive. “The jury is out on whether the demand will be there to absorb it or not,” says Martijn Rats, an analyst at Morgan Stanley. “The answer may be that it is not.”
Within the markets, the nervousness over China’s weak oil demand final yr saved crude costs inside their narrowest buying and selling vary in over 20 years in actual phrases.
Benchmark Brent crude ended the yr at simply over $74 a barrel, just a few {dollars} down from the start of the yr, regardless of crises within the Center East, the continued battle in Ukraine, a shutdown of oil manufacturing in Libya, and a greater than 20 per cent drop in Center Jap crude shipments to Europe due to assaults on tankers within the Crimson Sea.
If Chinese language oil imports proceed to gradual, it might essentially change the market, says Rats. “If you have slower growth for six months or a year, then you have softer oil prices and supply slows down a bit.
“But if you truly have very little oil demand growth then that is a different oil market in the future than it has been in the past.”
Many oil producers are loath to name this second a turning level, sceptical that China is fading as an engine of progress.
“It is too early to claim peak oil,” says Meg O’Neill, the chief govt of Woodside, Australia’s largest oil and gasoline firm. She factors to the truth that China’s financial system nonetheless has a protracted method to go to achieve western ranges of per capita wealth.
“If you go back over the last 20 years, there have been proclamations of peak oil at points of economic softness, and it’s proven to be incorrect,” she provides. “China still aspires to grow its economy and lift the standard of living and often that has a direct correlation to energy consumption.”
Opec, the oil cartel, has a bullish outlook for China regardless of final yr’s decline in imports, forecasting that consumption will proceed to develop, by 2.5mn b/d, from 2023 to 2050. Saudi Arabia and different Center Jap producers are likely to depend on Opec’s information when making coverage.
Saudi Aramco has additionally rejected the concept that China is slowing down. “When people talk about China, they are always trying to maximise the downside and ignore the upside,” mentioned Nasser final October on the Future Funding Initiative convention in Riyadh. “In general, there is still growth in China.”
Nasser insisted there was stronger and extra sturdy demand than official imports information implied, noting that the nation’s surging photo voltaic and wind energy industries nonetheless required massive quantities of oil.
“For 5 megawatts of wind-generated power you need 50 tonnes of plastics. For every electric vehicle you need 200-230kg of plastic. Even in solar panels, 10 per cent comes from fibre and so on. So for the transition to happen you need more oil,” he mentioned.
Saudi Aramco has mentioned the general public info on China’s oil consumption is unreliable. Because the nation doesn’t formally report oil consumption statistics, analysts estimate it from a spread of sources, together with import and export information, the modifications in stockpiles and the outflow from refineries. There have been a variety of estimates, with variations of as much as 1mn b/d, even for historic information.
Ziad al-Murshed, the corporate’s chief monetary officer, informed analysts on the finish of final yr that vital upwards revisions to 2023’s oil information “makes 2024 growth look less than it actually is. That kind of distorts the picture.”
On the IEA, analysts acknowledge that assessing China’s oil consumption is “quite challenging”. “It has been a very noisy period for Chinese demand between lockdowns and the return from lockdowns and chasing high growth,” says Ciarán Healy, an oil market analyst.
Nonetheless, the IEA continues to forecast that China will hit peak oil by the top of the last decade. That is primarily based on two big, and opposing, structural tendencies, Healy says.
The primary is the robust rise within the quantity of crude oil flowing into China’s quickly rising petrochemical trade. The second is the extra precipitous fall within the quantity of oil wanted for street transport.
“In the run-up to Covid, the growth [in oil use] was quite broad based; petrochemicals, road transport, jet fuel, everything grew,” says Healy. “Since 2019, petrochemical production has become a bigger factor. On a net basis, all of the growth in oil consumption globally between 2019 and 2023 is actually the growth of petrochemicals in China.”
China has been steadily constructing extra petrochemical vegetation to be able to change into self-sufficient within the plastics, solvents and fibres that its factories rely on.
“Chinese imports of polymers are still really big, but were enormous,” says Healy, referring to the category of chemical compounds that features nylon, polyester, polyethylene and Teflon, amongst others. “The statistic that blows my mind is that the [country’s] imports of polymers are something like 2 to 3 per cent of the world’s oil demand. That’s Germany’s [oil use] in demand terms.”
Echoing Nasser’s remarks, the IEA’s Healy says “probably about a quarter” of China’s enhance in petrochemical demand over the previous 5 years has come from wind generators and photo voltaic panels, and says “essentially all” of the expansion in China’s oil use going ahead shall be from the petrochemical sector.
However the IEA believes that the autumn in oil use for street transport shall be extra vital. “By 2030, three-quarters of cars being sold will be electric, and while you have growth in petrochemical demand, that’s nowhere near strong enough to offset that decrease in road transport,” says Healy. “It will plateau for a while and then start to fall a bit more sharply.”
In its base case situation, which extends the entire insurance policies presently in place, Healy says the IEA believes China’s oil consumption will fall from 16mn to 17mn b/d at current to about 12mn b/d by 2050.
China’s electrical autos increase, helped by authorities incentives to trade-in outdated automobiles for brand spanking new, reveals little signal of slowing down. The marketplace for pure battery and plug-in hybrids is rising about 20 per cent yr on yr, in contrast with an analogous contraction in petrol and diesel automobiles.
However some query whether or not the Chinese language state will sit again and let peak oil occur. Whereas the “revolution” in electrical autos is each “profound” and “mind-boggling”, says Victor Gao, chair of the China Vitality Safety Institute, the federal government shall be gauging the potential impression on its big, state-owned, oil refining trade.
He means that the nation’s state-owned refineries are unlikely to be all of a sudden disadvantaged of enterprise, however maybe there must be a change in technique.
“China’s refining capacity is huge. Until now, China has refined petroleum for its domestic use, it does not export refined products. But if China succeeds in this EV revolution, it may decide to refine crude oil into different products for export. That means China’s consumption of crude oil may not necessarily go down, it may hold steady,” he says.
It is usually a lot simpler now for China to line up crude oil provides, Gao notes, pointing to its deepening power ties with Russia, which has been a reliable supply of cheaper oil and gasoline since western international locations imposed sanctions regarding the Ukraine battle.
“This is changing China’s mentality,” he says. “It may be much easier, if the geopolitical risks can be managed, to expand its co-operation with Russia.” In 2023, Russia overtook Saudi to change into China’s prime oil provider.
If China’s oil demand is certainly passing its peak, the consensus is that India’s progress will change into the principle driver of progress in international oil consumption.
Whereas India’s thirst for oil nonetheless lags far behind China, Opec believes that the nation’s oil use will develop by 1.5mn b/d, roughly three-quarters of China’s further demand, between 2023 and 2029, whereas the IEA forecasts Indian oil progress to be 1.2mn b/d by 2030.
Although India has far smaller manufacturing, building and petrochemicals sectors than China, diesel and petrol automobile gross sales have but to be considerably displaced by electrical autos.
In response to JMK Analysis, a renewables analysis company, there have been just below 100,000 electrical automobiles offered in India final yr, roughly 5 per cent of an electrical car market that’s led by mopeds and e-bikes.
But analysts say that rising demand in rising markets is not going to come near matching that seen in China over the previous a long time. Whereas there’s more likely to be materials progress elsewhere in south-east Asia, the IEA mentioned the efficiency of those economies could be affected if China’s financial slowdown continued.
Oil consumption is rising throughout Africa and the Center East, however stays solely a tiny fraction of China’s progress in absolute phrases. Latin America’s oil use was primarily flat, mentioned the IEA.
In brief, an finish to China’s oil increase could be a tectonic shift that’s unlikely to be reversed, in accordance with analysts.
“You can say other countries can pick up the slack, and India’s oil demand is still growing, but there was something quite oil intensive about the growth that China has pursued over the last 30 years,” says Rats of Morgan Stanley.
Some might disagree on the precise second when China’s urge for food for oil peaks, however the IEA’s Healy says long-term demand is barely going in a single route — and producers and oil-exporting international locations should be ready.
“It may still be profitable for them to extract oil and gas from the ground and sell it but it will be a huge reduction in their overall income,” he says. “Given how dependent those countries are on oil and gas exports, that would have massive implications.”
