The oil industry's euphoria over record profits in recent years is fading, as key players gather in Singapore for the Asia Pacific Petroleum Conference (APPEC).
A combination of China's economic downturn, changes in the global energy landscape, and rising crude supply is pressuring the sector. Refining margins have dropped, and analysts are adjusting price and demand forecasts downward. Recent oil price gains have been erased, and OPEC has postponed planned supply increases to avoid creating a surplus. Key factors influencing the freight outlook include Chinese demand for crude oil and products, the upcoming US elections, economic conditions in the US, and the potential resolution of geopolitical conflicts.
China's waning crude oil demand – A new era for global energy market
· China's diminishing role as the global engine for crude demand is forcing the market to reassess. Several factors are converging to dampen the country's role as a driving force for global crude demand, including a property market slump, weak consumer confidence, an ageing population, and a transition toward greener energy.
· Some analysts now project much slower growth in China's oil consumption, with forecasts for 2025 predicting an increase of just 300k b/d—25% lower than earlier estimates from OPEC. For this year, growth is expected to be a modest 200k b/d.
· OPEC+ is facing growing challenges in maintaining its influence in China. Stricter crude import policies and rising competition from lesser-known suppliers are gaining traction.
· Even Saudi Arabia's significant investments in Chinese refineries may struggle to counterbalance the decline in demand. Falling refining margins have made it harder for processors to afford imports, causing operating rates in China's private refining sector to drop to 50% or less in recent weeks. Additionally, state-owned refiners are now considering reducing volumes in an unseasonal move, further signalling cooling demand.
· In the short term, China's subdued economic outlook continues to weigh on oil demand and dampen market sentiment. Underperformance in key sectors such as real estate and construction is exerting downward pressure on gasoil and diesel markets. On top of these challenges, tight tanker supplies and high freight costs—exacerbated by rising shipping insurance prices—are adding further strain.
China’s refining industry faces declining demand and shift to EVs and chemicals
· Electric vehicle (EV) adoption is accelerating and is particularly popular in megacities and southern/eastern China, where well-developed infrastructure and cheaper electricity make them more attractive. For instance, charging an EV costs about 32.50 RMB, compared to 500 RMB for refuelling a gasoline car.
· Meanwhile, LNG trucks are emerging as a significant force in reducing diesel consumption. By 2024, LNG trucks are expected to replace around 280k b/d of diesel demand, with truck sales projected to reach 850,000 by the end of the year. Currently, LNG is about half the price of diesel in China.
· These shifts toward EVs and LNG trucks are reducing China's reliance on traditional oil products like gasoline and diesel, contributing to a decline in crude imports. In response, trading houses like Vitol are adjusting their strategies, investing in assets such as fuelling stations, and LNG infrastructure, while also diversifying into other sectors.
· While EVs and LNG trucks are reshaping the transportation fuel landscape in China, jet fuel demand is recovering, supported by the resurgence of both international and domestic travel. By the end of 2024, jet fuel demand in China is expected to reach 84% of 2019 levels.
· Shandong's teapot refineries are struggling with declining demand and stricter regulations. Major state-owned refineries, however, are operating at full capacity. Overall expansion in refining capacity will slow down, as the Chinese government plans to cap refining capacity at 1 billion tons per year by the end of 2025. The refining industry is increasingly focusing on producing chemicals, as demand for refined oil products plateaus and carbon emission regulations tighten.
US economic outlook: Rate cuts to boost growth and drive commodity demand
· The US economy remains robust, supported by strong productivity and fiscal stimulus. Inflation is trending downward, though the pace of decline varies across sectors due to differences in demand growth and supply availability. The services sector and private investment continue to be major drivers of economic strength, with Q3 GDP growth projected around 2% according to Platts's Chief Economist. However, a slight moderation is expected heading into Q4. The labour market remains steady, buoyed by a higher-than-expected number of job openings.
· As the Federal Reserve is anticipated to begin cutting interest rates in September, several dynamics could come into play. Lower interest rates would likely lead to a weaker US dollar, making commodities relatively cheaper and potentially driving up demand. A more favourable business environment could also encourage companies to take on more risk, further supporting economic activity.
Resilience and flexibility in the global oil market: Adapting to geopolitical tensions and emerging supply dynamics
· Geopolitics no longer sharply impacts oil prices and trade flows, thanks to the increasing diversity of oil supply sources, particularly from the Atlantic basin—such as the US, Guyana, and Brazil. Despite ongoing conflicts and international sanctions, the crude oil market has remained resilient. The global oil market, especially in Asia, has adapted by rerouting supply chains, ensuring stability without major disruptions in crude supply or physical trade flows.
· Currently, supply concerns are minimal. Even with OPEC+ delaying plans to reverse production cuts and oil production disruptions in Libya, new crude grades and sources have emerged, enhancing flexibility in the global market. For instance, China has started importing Canada’s Access Western Blend crude, and Nigeria’s new Nembe crude is now reaching Asia, further diversifying the region's supply options.
· However, potential resolutions to the Israel-Palestine conflict or a de-escalation of the Russia-Ukraine war could reverse inefficient trade routes and impact tonne-mile dynamics.
· Looking ahead, the phasing out of older tonnage, the restructuring of inefficient trade routes, and the evolving status of the dark fleet—which continues to operate but faces challenges with scrapping (a growing number of “first generation” dark fleet tankers are no longer able to trade and are quietly being made available for recycling.) —could introduce additional volatility into the market.