China's Oil Demand Rebounds on Diesel

China’s apparent oil demand staged a modest recovery in October from a year ago, driven by a surge in diesel demand.

China’s apparent demand rose to 13.99 million barrels per day in October, Energy Intelligence calculates, based on refinery throughput and net imports of 11 different refined products.

At the same time, Beijing looks increasingly unlikely to increase its crude imports this year with China expected to post its first decrease in annual crude imports for over a decade.

Diesel Demand Key Driver

China’s apparent oil demand rose last month mainly on the back of stronger diesel demand, which jumped by more than 11% from September, and by more than 23% from a year ago to 3.37 million b/d.

Such strong demand growth had not been seen since June 2020 when Beijing was supporting the country's economic recovery via infrastructure projects, and to the manufacturing industry — two sectors that usually drive diesel demand.

However, this time the jump in demand has come from tight supplies, which fell in the third quarter after the government introduced in June a consumption tax on light-cycle oil (LCO), a blending component used by small refineries to boost the quantity and quality of their diesel output.

China’s diesel output fell 3.5% to 3.16 million b/d in the first nine months of this year, leading to a surge in prices at the pump in October, and prompting state refiners to boost diesel output and curtail their diesel exports, thereby boosting apparent demand for diesel.

State-run refiners PetroChina and Sinopec are further boosting their diesel output this month and next, which could lead to further strong diesel demand over November and December, especially as they have limited export quotas left.

Kerosene-Jet Demand Remains Weak

China’s jet demand in October rose only marginally from September as the country experienced more local lockdowns and authorities restricted domestic travel to keep Covid-19 Delta outbreaks under control.

At a time when Asia-Pacific countries start reopening their borders and jet demand rises in most of the region, China looks set to become the outlier.

Domestic travel to and from Beijing is expected to be restricted until the February Winter Olympic Games.

Additional restrictions have emerged. Beijing announced in October it would limit international passenger flights to 408 per week up to March 2022, down from more than 3,000 international flights a week before the Covid-19 pandemic.

Higher Winter Refining Runs?

On a year-to-date basis, China’s apparent oil demand continues to grow but at an increasingly slower pace.

Over the first 10 months of this year, China’s apparent oil demand is up 6.25%, or 824,000 b/d, from a year ago.

But an expected rebound in refinery runs, on the back of additional crude import quotas and a push for diesel, could reverse the trend for November and December and help China’s oil apparent demand grow by 1 million b/d or more over 2020's apparent demand.

However, China looks increasingly unlikely to increase its crude imports this year. China imported 10.25 million b/d of crude over January-October, well below its 2020 record high of 10.86 million b/d.

To achieve a similar level of imports for 2021, China would need to import around 13.9 million b/d over November and December, Energy Intelligence calculates — a surge that seems unlikely given high oil prices.

Instead, China is expected to post its first decrease in annual crude imports for over a decade, although it would likely still exceed its previous record high of 10.15 million b/d for 2019.