Oil Holds Gains With China Demand and Geopolitical Risk in Focus

Oil prices have been holding steady, buoyed by a combination of factors including China's evolving demand dynamics and persistent geopolitical risks. As the world's top crude importer, China's shift towards electric vehicles (EVs) and liquefied natural gas (LNG) trucks is accelerating, which is expected to peak oil demand as early as 2025. This shift is driven by the increasing penetration of EVs and LNG-fueled trucks, which are displacing some gasoline and diesel demand, respectively. For instance, electric vehicles currently account for about half of car sales in China, undercutting 3.5% of new fuel demand in 2024, while the use of compressed and liquified natural gas in road freight displaced another 2%.



The International Energy Agency (IEA) also reported that global oil demand growth has markedly decelerated and is set for just 900,000 bpd in 2024 due to rapidly slowing Chinese consumption. The agency cut its growth estimate by 70,000 bpd from last month’s assessment, citing the rapidly slowing China as the main driver of the sluggish growth. The IEA forecasts that China’s oil demand is now set to expand by only 180,000 bpd this year, “as the broad-based economic slowdown and an accelerating substitution away from oil in favour of alternative fuels weigh on consumption.”

The slowdown in fuel consumption growth has followed a combination of structural changes in the Chinese economy and the rapid deployment of alternative transport technologies. The economy is undergoing a period of moderating growth and restructuring. China reported GDP growth of 5% in 2024 (4.2% in nominal terms), lagging its pre-pandemic trend and led by high-tech and clean energy manufacturing growth (9% in 2024). A slump in the construction sector, historically a cornerstone of gasoil use, alongside sluggish consumer spending, which is closely associated with personal mobility and gasoline demand, has meant that recent GDP gains have been less fuel-intensive than in the past.

The key geopolitical risks currently influencing oil markets include sanctions on Russia and Iran, as well as potential disruptions to energy trade flows. These risks have the potential to significantly impact global oil supply and demand dynamics, thereby affecting investment decisions in the oil sector. The United States announced additional sanctions on several oil vessels transporting crude oil from Russia on January 10, 2025. These sanctions could potentially disrupt Russian oil exports, leading to supply shortages and price volatility. As a result, refiners in China may reduce purchases from Russia and replace those barrels with others from crude oil exporting countries not subject to sanctions, such as Brazil, Canada, the United States, or countries in the Middle East. This shift in supply sources could increase the cost of crude oil imports for China and other countries, affecting their refining and marketing strategies.

The global uncertainty regarding the trajectory of OPEC+ cuts and potential disruptions to energy trade flows could also impact oil markets. For instance, the Group of Seven (G7) country import bans and sanctions limited Russia's ability to sell crude oil after its full-scale invasion of Ukraine in 2022. These actions prompted Russia to sell some of its crude oil at discounted prices, making it more attractive to certain buyers. However, the potential for further disruptions to energy trade flows could lead to supply shortages and price volatility, affecting investment decisions in the oil sector.

The cost of living crisis affecting consumer behavior in major markets such as China and Germany has already resulted in oil production outperforming demand. This trend is expected to continue well into 2025 and 2026 as greater upstream activity in non-OPEC countries, such as the United States and Guyana, is set to flood the market with more oil. This surplus in oil production could lead to lower oil prices, affecting the profitability of oil companies and their investment decisions.

Energy policy changes can be expected under a new administration following the 2024 US elections. These changes could impact the oil and gas industry's capital discipline, increasing customer centricity, and investments in new technologies. For instance, the US Federal Reserve's stance on rate cuts could clarify some of the previous uncertainty about the US Federal Reserve’s stance on rate cuts. In addition to the 75- to 100-basis-point reduction in 2024, the Fed foresees the scope for a total of close to 150-basis-point rate cut in 2025 and 2026. This could affect the cost of capital for oil companies and their investment decisions.

In the coming years, these geopolitical risks could evolve in several ways, affecting investment decisions in the oil sector. For instance, the sanctions on Russia and Iran could be lifted or tightened, depending on the geopolitical situation. Similarly, the trajectory of OPEC+ cuts and potential disruptions to energy trade flows could change, affecting global oil supply and demand dynamics. Additionally, energy policy changes under a new administration could impact the oil and gas industry's capital discipline, increasing customer centricity, and investments in new technologies. Therefore, oil companies will need to closely monitor these geopolitical risks and adjust their investment strategies accordingly.