Prolonged trade war could wipe out half of China’s projected oil demand growth / Rystad Energy oil market note

Oil prices face downward pressure as US talks with Iran, US tariffs, rising OPEC+ supply projections and lowered oil demand estimates from the IEA and OPEC create the perfect storm for low investor confidence.

With tensions between the US and China continuing to simmer, a potential tit-for-tat tariff war is expected to further pressure oil prices, which have already shown signs of weakening—dragging down product prices as well.

Rystad Energy analysis shows that a prolonged trade war could wipe out up to half of China’s projected 2025 oil demand growth of 180,000 barrels per day (bpd), should downside risks to the country’s outlook materialize. The US-China and US-Iran tensions are intertwined. However, the seasonal summer increase in oil demand will be key to watch, in addition to crude demand by refineries vs. oil supply. The fundamentals do point toward a tighter summer balance and signal a price increase from the current level of $67 per barrel for Brent to the low $70s.

Chinese gasoline and diesel prices declined less than in Singapore, closing arbitrages, while jet fuel arbitrage stayed open.

With negative export margins deepening, refiners rediverted some planned exports towards the domestic market amid a heavy maintenance season.

With independent refiners set to raise utilization rates amid strengthening margins, gasoline and diesel cracks are looking to weaken in the coming weeks.

Trade war poses downside risks to China’s oil demand outlook

The ongoing trade war has upended markets’ global economic outlook, hitting commodity prices and changing the oil demand outlook.

The uncertainties of US President Donald Trump’s tariff policies disrupted the markets’ original trajectory and posed concerns over the macro economy and demand outlooks.

China’s first quarter gross domestic product (GDP) growth beat expectations at 5.4%, together with other macroeconomic indicators showing growing signals such as exports, the Purchasing Managers’ Index and retail sales.

Strong economic growth in the first quarter was the based on last September’s stimulus taking effect gradually.

Assuming trade relations between China and the US remain disrupted, we expect a mild scenario is very likely for this year, with China’s GDP growth slowing down by one percentage point.

The impact of slower GDP growth on Chinese oil demand growth would be a deceleration of 0.47 of a percentage point, as the economy is still relatively industry- and export-driven.

With the country set to announce more stimulus in the face of the trade war, we expect some upside potential to offset the negative impact from the trade war and mitigate the oil demand growth loss. Overall, the current estimate indicates a loss of 90,000 bpd growth in oil demand from 180,000 bpd levels.

The biggest loss is in diesel and biggest gain in naphtha – offsetting some demand loss.

Petrochemical and diesel demand will bear the most downside pressure because of the trade war, as consumer spending and industry prosperity and industry-related transportation will be damaged by potential trade decline.

However, domestic petrochemical feedstock demand could be supported by less dependence on imports amid the lifted tariffs.

Liquefied petroleum gas (LPG) demand growth will slow down with a shift towards naphtha demand upside as a potential utilization rate increase of steam crackers will offset the loss from propane dehydrogenation (PDH) as propane relies on external supply.

Around 100,000 bpd of propane demand will be at risk if the trade war sustains and PDH operators are unable to pivot, with the US dominating supply.

Gasoline and jet fuel demand, strongly associated with personal and business mobility, will not be negatively impacted in a mild trade war scenario.

There could, however, be some restructuring between international and domestic travel and potentially a changed average distance of travel, while some upside potential exists as lower prices are likely to boost consumption.

Refinery margin rise, supporting runs

The US-China tariff spat dampened the demand outlook and pressured crude prices, which coincided with higher domestic needs for road fuels amid holidays in China.

The recent strength in the domestic market has spurred worries about tight supply amid sanctions.

Small independent refiners in Shandong that are reliant on discounted sanctioned crude are running at low rates because of tightening US sanctions on Iranian crude.

Without cheap crude, it is hard for those small independent refiners to raise runs much.

Triggered by rising margins, runs from these so-called ‘teapot’ refiners are slowly recovering, with slow imports of Russian and Iranian crude amid sanctions.

State-owned refineries will gradually come back from maintenance from June, relieving the market’s concern of potential tight supply – and a rethink on a fuel oil tax deduction policy to support teapot runs was proposed amid sanctions.

Signals:

1. China crude oil imports rebounded to 12 million bpd in March, a 19-month high, amid recovering imports from Russia and Iran after a muted January and February. Significant stock draws have been seen in the first two months of this year amid sanctions, and we expect crude storage levels to rebound amid active crude buying in March and April.
2. Domestic car travel surged during the Tomb Sweeping holiday between 4 and 6 April, supporting gasoline demand. The Labour Day holiday from 1 to 5 May might spur restocking in the second half of April. Strengthened gasoline cracks have encouraged para-xylene-producing companies to cut runs to produce more meta-xylene to blend into gasoline.
3. The April exports plan was cut to capture domestic profits. Chinese refiners are shifting oil product cargoes scheduled for exports to the domestic market, as margins have skyrocketed following a drop in crude prices.
4. April product loadings have come down, with an initial plan of 170,000 bpd of gasoline and 110,000 bpd of diesel.
5. Chinese state-owned refineries are still shunning sanctioned Russian crudes, while Shandong refiners are taking the chance to increase Russian imports.
6. Iranian crude unloading in China has slightly recovered after falling to zero last week following US sanctions. We expect China will carefully unload more Iranian cargos at Shandong ports, and any further sanctions will again plunge the weekly unloading to zero. The market is still concerned the US will sanction more companies for buying Iranian crude.
7. Teapot refineries currently rely to a large degree on Russian crude and a small share of Iranian barrels to run their refineries as fuel oil processing has become unprofitable since the start of this year with the policy change.
8. ExxonMobil has started up and produced ethylene at its new 1.6 million-tonne-per-annum cracker in Huizhou, in China’s Guangdong province, the US major announced on 12 April. The start-up of this project will support China’s naphtha demand and imports.
9. China’s LPG market has reacted rapidly to tariffs. Refineries have been selling LPG in the domestic market instead of using it on-site, while some propane users may switch to naphtha or reduce run rates.
10. China remains a net importer of ethylene and propylene, despite rapid cracker and PDH plant expansions. Imports from South Korea, Japan and other Asian countries could rise if domestic run rates decline because of tariffs.

Signposts:

1. Potential escalation of sanctions on Iran could threaten teapot runs further. Two teapot refiners have already been sanctioned directly by the US.
2. Sinopec Zhenhai’s potential start-up delay.
3. China is still open to negotiations with the US even amid continued tensions between the two countries.