China's July Oil Demand Sinks to 27-Month Low

China's apparent oil demand plunged 7.5% in July versus June to 12.79 million barrels per day — the lowest monthly tally since April 2020, when China was starting to emerge from its first wave of the Covid-19 pandemic.

The unexpectedly low July number — largely the result of collapsing refinery runs — left China's apparent oil demand for January-July 2022 down 2.5% at 13.33 million b/d versus the same period of last year, Energy Intelligence calculates.

To surpass the 2021 average of 14.07 million b/d this year, China's apparent oil demand would have to average 14.72 million b/d in August-December, an increase of 1.39 million b/d over the January-July average, Energy Intelligence calculates.

Such a strong rebound in China's oil demand seems increasingly unlikely if Covid lockdowns continue, especially given concerns about the possibility of a global recession triggered by runaway inflation and rising interest rates.

Energy Intelligence calculates China's apparent oil demand from the country's refinery throughput plus its net imports of 11 different refined products.

The calculation does not include changes in inventory levels because that information is not publicly available in China.

Refinery Throughput Slumps

Crude runs at Chinese refineries fell to a fresh 2-year low of 12.58 million b/d in July. That was down 842,000 b/d from June when runs seemed to be picking up as Covid lockdowns were lifted.

"Refinery runs were much lower than I expected," energy consultancy FGE's China expert Mia Geng told Energy Intelligence. "I think the overall inventory pressure and uncertainties to demand eroded any incentive for refiners to run any higher."

Some industry sources believe the low crude runs reflect several months of dismal demand.

"There is no recovery. Hopefully things can change for the national day holidays [the first week of October]," a source at a small private refiner told Energy Intelligence.

The closure of the 320,000 b/d Sinopec Shanghai PetroChemical refinery after a fire in June, along with maintenance at several plants, partly explain the low July crude runs.

Still, the July refining data may not have captured all of the crude that was actually processed during the month.

In August Chinese authorities launched a new round of tax audits for independent refiners, which tend to under-report their output of gasoil and gasoline to lower their tax bills.

Beijing has long been trying to crack down China's small "teapot" refineries, which have a reputation for dodging taxes.

Some refiners may have started to under-report their crude processing in July to make sure that the numbers match up with their output of products.

Sources say that further cuts in crude runs or under-reporting of throughput can be expected in August.

Uncertain Demand Outlook

Investment in infrastructure grew by more than 10% year-on-year in July and has made an important contribution to China's economic growth.

Consultancy Energy Aspects says a seasonal uptick in construction activity in September and October will drive diesel demand to its highest level this year.

Brutal heat waves in China may also boost the consumption of diesel for power generation, with output of hydropower unlikely to recover in the short term.

Refiners are also pinning their hopes on an increase in travel during the Sep. 10-12 Mid-Autumn Festival and the National Day holidays in October.

However, China's continuing adherence to a strict zero-Covid policy may limit travel.

Around 150,000 tourists found themselves trapped on the southern island of Hainan earlier this month as a Covid outbreak in the city of Sanya prompted the authorities to lock the island down for a week.