China's Oil Demand Stagnation: Hengli's Bearish View vs. Global Market Contradictions

Hengli Petrochemical's CEO warns of prolonged weakness in China's oil demand through mid-2026, directly clashing with broader market optimism for a partial recovery. The company cites slow domestic GDP growth, escalating U.S.-China trade tensions, and the accelerating shift to electric vehicles as key headwinds, compounded by chronic overcapacity in petrochemicals and record-high strategic petroleum reserves that suppress near-term consumption. Meanwhile, the IEA expects global oil demand to grow 770 kb/d in 2026, with China's Q3 rebound of 920 kb/d already signaling resilience amid easing trade frictions and macroeconomic stimulus according to the IEA report.

The divergence hinges on competing narratives: Hengli emphasizes structural stagnation driven by weak industrial activity and inventory glut, while the IEA notes concrete demand rebounds-particularly in petrochemical feedstocks and transportation-offsetting broader contraction risks. Still, even as China's consumption shows flashes of strength, the IEA's forecasted 2026 global surplus of 1–1.5 mb/d reflects supply outpacing demand, with OPEC+ and non-OPEC+ producers adding 2.5 mb/d next year. This disconnect leaves investors navigating a landscape where localized recovery signs coexist with persistent overhang risks.

For now, policymakers' next moves-especially during China's 2026 Two Sessions-could tip the balance. If export incentives or reserve purchases materialize, they might temporarily buoy demand, but high inventories and lagging petrochemical margins keep near-term upside constrained.

Petrochemical Strength vs. Transportation Decline

China's oil demand is splitting into two distinct paths.

Petrochemical feedstock demand surged 5% in 2024, driven by new production plants. Meanwhile, transportation fuels like gasoline and diesel fell 2.5% from their 2021 peak, reflecting stronger headwinds.

This divergence aligns with China's 4.8% GDP growth projection for 2025. While infrastructure investment and exports provide near-term demand support, structural shifts toward high-quality growth and an aging population are dampening fuel intensity. The economy's transition away from construction and heavy industry has reduced overall oil consumption per unit of GDP, even as output expands.

Petrochemicals are gaining relative importance. Their share of total oil demand could reach 45% by the late 2020s, per industry forecasts. Yet this growth alone won't compensate for transportation's decline. EVs now represent about 50% of new vehicle sales, directly suppressing gasoline needs.

Refineries face a new reality: higher margins on petrochemicals but weaker volumes from transport fuels. The IEA and CNPC ETRI warn that overall oil demand will plateau unless petrochemical growth accelerates dramatically. China's fiscal stimulus helps GDP, but it doesn't reverse electrification or industrial restructuring. For now, petrochemical strength masks transportation weakness-without resolving the broader demand imbalance.

Policy Catalysts and Upside Scenarios

Policy uncertainty remains the most potent lever for near-term oil demand recovery. Hengli Petrochemical's CEO warns that weak demand could persist until mid-2026, citing sluggish growth, trade frictions, and electrification trends. Yet the Chinese government's Two Sessions meeting in early 2026 could act as a major catalyst. If Beijing moves to stimulate demand through export quota expansions or strategic reserve purchases, it could absorb excess supply. Still, current high inventories and opaque reserve policies temper optimism, capping immediate upsideid_1.

Goldman Sachs now expects China to accelerate stockpiling to 500,000 barrels per day through 2026, nearly tripling prior estimates. This surge-driven by low prices and energy security concerns-could push Brent below $55/barrel. However, the International Energy Agency warns that global oversupply may persist despite these efforts, as OPEC+ output rises. The mismatch between China's reserve buildup and global fundamentals creates volatility, with prices sensitive to both policy shifts and production decisions.

Electric vehicle adoption compounds uncertainty. Transportation fuel demand plateaued in 2024, with gasoline, diesel, and jet fuel down 2.5% from 2021 levels. EVs now represent roughly half of new vehicle sales, accelerating the shift away from traditional oil products. While petrochemical feedstock demand grew 5% in 2024, broader demand stagnation looms as China's economy transitions toward services and high-tech manufacturing. The confluence of policy-driven demand surges and structural declines means markets must weigh short-term stimulus against long-term trends.

Policy shifts remain the primary variable for near-term recovery. If reserve purchases or export incentives materialize during the Two Sessions, they could temporarily offset weak demand. Yet the risk of overstocking or delayed implementation persists. Investors should monitor official announcements for concrete signals while acknowledging the fragile balance between stimulus and supply glut.

Risks and Balance-Sheet Pressures

The macroeconomic and policy environment presents several headwinds that could materially impact oil market fundamentals and corporate balance sheets. A persistent global oil surplus, driven by OPEC+ production growth, creates significant price pressure. Goldman Sachs projects China's strategic stockpiling will only partially offset this, leaving Brent prices vulnerable to fall below $55 per barrel in 2026 if inventory accumulation stalls. This scenario would directly squeeze upstream producers' revenues and capital allocation flexibility.

Domestically, China's economic trajectory raises serious near-term demand concerns. The nation's GDP growth is projected to decelerate to 4.4% in 2026, hampered by ongoing real estate sector distress and persistently weak consumer spending. This environment threatens the robust industrial fuel demand needed to absorb current output levels, potentially leading to further inventory buildups and downward pressure on prices.

Furthermore, the effectiveness of sanctions against Russian oil exports remains uncertain, with the IEA noting disruptions haven't yet curtailed global flows according to the IEA report. Coupled with China's structural GDP slowdown, these factors undermine the recovery assumptions underpinning current demand forecasts. The combination of potential oversupply, tepid domestic demand growth, and unresolved geopolitical friction creates a challenging backdrop for maintaining healthy cash flows and managing existing debt burdens across the sector. Companies must navigate this complex landscape while facing potential margin compression and increased scrutiny on financial resilience.