China's Oil Demand Resilience: Petrochemicals Offset Transportation Weakness

China's oil demand landscape is splitting into two distinct narratives. While transportation fuels hit a wall, petrochemical feedstocks are surging. This divergence isn't cyclical-it reflects deep structural changes.

Gasoline demand plunged 14% in August 2024 versus the prior year, with total transportation fuels stagnating at 8.1 million barrels per day last year-2.5% below 2021 peaks. The drag comes from electric vehicles now accounting for over half of new passenger car sales, alongside weaker economic growth and demographic headwinds like a shrinking population reducing vehicle miles traveled according to EIA data. The International Energy Agency (IEA) warns this is only the beginning, projecting further fuel declines as EV adoption and public transit expansion accelerate.

Meanwhile, petrochemical feedstock demand grew 5% in 2024, fueling nearly all global oil demand increases this year. New chemical plants are gobbling up crude, with the U.S. Energy Information Administration (EIA) forecasting 2024 oil growth of only 0.1 million barrels per day-entirely from these non-transport sources.

This structural split creates risks. The petrochemical boom depends on construction projects that could face delays from slower economic activity. With China's GDP growth projected at 4.1% in 2025, weaker spending could ripple through downstream markets. The transportation sector's decline, meanwhile, remains deeply entrenched-making recovery unlikely without a technological or policy shift.

Import Shifts and Geopolitical Sources

China's crude oil imports eased slightly last year, falling 2% to 11.1 million barrels per day. This moderation stemmed from weaker diesel demand, even as gasoline and jet fuel use grew, pushing refiners toward petrochemical feedstocks like LPG and naphtha. These shifts have reshaped import patterns, with Russian energy supplies playing an increasingly prominent role.

Refinery operations also slowed, utilization dropping to 14.2 million barrels per day from 14.8 million barrels per day in 2023. The decline reflects softer demand for transportation fuels and a strategic pivot toward petrochemical production. Geopolitically, Russian LPG and naphtha exports have surged into China, partly filling gaps created by Western sanctions and supply chain reconfigurations. This Russian share growth remains a significant, though volatile, factor in China's evolving energy security picture.

However, recent policy changes introduce headwinds. A December 2024 tax policy cut export rebates on petroleum products, potentially making Chinese refined exports less competitive and further dampening refinery activity. While expanding domestic refining capacity offers some offset, these tax pressures create uncertainty for the sector's future import reliance and margin profiles.

Growth Constraints: Electrification and Structural Headwinds

Structural forces are now actively reshaping China's oil demand trajectory. While the property sector slump has sharply contracted diesel consumption-a 3.52% year-over-year drop in H1 2024 specifically linked to weaker construction activity-electrification is accelerating the transition away from oil. New energy vehicles now account for nearly 40% of all car sales, while natural gas trucks have reached 42% market penetration among heavy freight. This dual pressure contrasts sharply with earlier expectations, having cut China's projected oil demand growth for 2024 to just 180,000 barrels per day (bpd), down from the 410,000 bpd forecast earlier in the year.

The pace of this shift fuels debate over when oil demand might peak. Some analysts, citing refinery throughput declines at major state-owned producers like Sinopec-a 2% drop in crude processing and 10.27% plunge in diesel output-argue demand may have already peaked in 2023. Others, incorporating the broader structural trends of electrification and gas substitution, project the peak window could stretch between 2023 and 2027. This extended timeframe reflects both the strength of existing oil consumption and the accelerating, but not yet total, replacement by alternatives.

However, the outlook remains clouded by the unresolved state of the property sector. Its weakness isn't just depressing current diesel demand for construction; it's a leading indicator of broader industrial activity. Continued stagnation here could prolong the oil demand slowdown beyond electrification trends alone, creating prolonged uncertainty. The combination of a structural shift towards substitutes and this persistent macroeconomic headwind suggests China's oil demand may peak before 2030, potentially reshaping global markets with reduced growth and lower prices. The path to that peak, however, hinges significantly on this critical, unresolved economic variable.

Shifting Sands in Oil Demand

Following earlier analysis of China's demand slowdown, the latest evidence confirms these are not fleeting blips but structural shifts with lasting market impact. Investors must recalibrate expectations for traditional oil players as growth drivers weaken.

China's oil demand growth has stalled dramatically. Consumption of transportation fuels like gasoline, diesel, and jet fuel hit 8.1 million barrels per day in 2024, a 2.5% drop from 2021 levels, driven by electric vehicle adoption, economic restructuring, and reduced construction activity. This stagnation is stark: the pace of growth slowed sharply to just 180,000 barrels per day in 2024, less than half the earlier 410,000 bpd projection, as new energy vehicles captured 38.6% of the market and high-speed rail cut road and aviation fuel use. According to policy analysis, while new petrochemical plants fueled a 5% increase in feedstock demand, this only accounted for under 20% of global oil demand growth in 2024, highlighting how fragile overall growth has become.

The most concerning implication is the potential for China's oil demand to peak before 2030. Data from Sinopec shows a 2% decline in crude throughput and a 10.27% drop in diesel output, reflecting weakened industrial activity and stagnant fuel demand amid rising electrification. Analysts see combined gasoline, diesel, and kerosene consumption possibly peaking already in 2023-2027, a development that could permanently reshape global markets. This creates downward pressure on prices, especially with OPEC+ maintaining spare capacity and non-OPEC supply increasing.

For investors, this necessitates action. Traditional oil producers face valuation adjustments as near-term demand growth expectations shrink. Portfolios need rebalancing away from companies overly reliant on Chinese transportation fuel demand. Scenario planning is critical; while petrochemical capacity expansion offers some upside, the risks are substantial: policy shifts, slower-than-expected EV adoption, or unexpected industrial recovery could alter the trajectory. The market uncertainty surrounding China's peak demand projection demands a cautious, nuanced approach to oil investments.

The petrochemical story remains the primary bright spot, but its contribution to overall growth is minor. Investors should monitor this segment closely while preparing for prolonged pressure on conventional oil demand fundamentals.