Faltering China Oil Demand

Global oil markets are entering a period that not only intersects with Chinese economic contraction, but also an embattled former US president’s attempt to secure a second term, along with the inability of Saudi Arabia, the world’s largest crude exporter, to balance its budget no matter how high the price of oil.

China, for its part, has a struggling economy, one that western analysts claim is much worse than Beijing is indicating. Transport activities clearly dropped in previous days, with both highway and subway traffic falling to a level close to last year, and with both port and container throughput and the number of ships (and total dead-weight-ton) departing/arriving at Chinese ports falling sharply. Oil imports are also dropping due to weaker-than-expected economic growth.

The swapping of natural gas-powered trucks to replace diesel ones, and declining gasoline usage for passenger cars, often with new electric vehicles hitting the roads, is also curbing overall Chinese demand, with demand growth expected to dip below 3 percent this year compared to 2023, according to Reuters estimates. By way of comparison, China’s annual oil demand growth averaged nearly 5 percent over the past decade, rebounding to a robust 11.7 percent in 2023 after nearly three years of Covid-era lockdowns.

Weak Chinese oil demand growth is also lowering total oil demand in Asia, the world’s largest oil importing region. A total of 24.88 million barrels per day (bpd) of crude arrived in Asia in July, down 6.1 percent from the previous month. For the first seven months of 2024, Asian crude oil imports averaged 26.78 million bpd, down some 340,000 bpd from the same period last year.

OPEC intersection

The quandary for the Organization of Petroleum Exporting Countries (OPEC) producers is that they rely heavily on crude oil sales to Asia, and predominantly to China, to meet their respective oil export quotas and national budgets. The cartel’s thinking, however, seems to be that China’s oil demand growth is always guaranteed in spite of economic headwinds. This miscalculation is reflected in its regularly updated oil export forecasts.

OPEC stuck to its July forecast that global demand would rise by 2.25 million bpd in 2024, led by an increase in Chinese imports of 760,000 bpd. However, the International Energy Agency (IEA) offers a more pragmatic forecast. In its most recent analysis on July 11, the IEA placed global oil demand growth at 970,000 bpd. Within the forecast is the expectation that China will account for around 40 percent of that total.

The takeaway isn’t just that IEA forecasting models differ from OPEC’s, but that weak oil demand growth in China will negatively impact OPEC producers (particularly Saudi Arabia, its largest producer) even if oil prices trade at healthy levels. The daily spot price of global oil benchmark, London-traded Brent crude averaged US$82 per barrel in 2023. So far this year, prices have been trading around US$80 per barrel. However, these price points are still problematic since Saudi Arabia’s fiscal oil breakeven price is just over US$75 per barrel. Worse yet, the International Monetary Fund (IMF) said in April that Saudi Arabia would require an average of US$96.20 to balance its budget, assuming it holds output near 9.3 million bpd.

That US$96.20 breakeven point comes as Saudi Arabia indulges itself in a fiscal spending spree. The kingdom’s most recent budget outlines total expenditures of 1.251 trillion riyals (us$333.6 billion) against revenues of 1.172 trillion riyals, a 79 billion deficit. More budget shortfalls are expected in 2025 and 2026. Riyadh, however, seems oblivious to the impending fiscal danger, highlighting instead its continued commitment to structural and economic reforms as part of Saudi Vision 2030.

Saudi Arabia’s spending isn’t just fiscally irresponsible, it’s even reckless since the country faces more economic headwinds than most countries that consistently post budget deficits since it predominantly relies on crude oil sales to fill state coffers. A such, it won’t be able to withstand sustained periods of lower oil prices. Since oil markets are cyclical and prices always drop periodically, sometimes to record lows, Saudi Arabia will be forced to turn to debt financing to support its economy.

This has happened before. Global oil averaged only US$43.67 per barrel in 2016, pushing Saudi Arabia into a fiscal spiral. On October 14, 2016, it was forced to float its first international bond worth US$15 billion to help offset budget deficits of around US$100 billion carried over from the previous year. Subsequent bond issuances ensued over the next several years. At the time, rumors were coming out of Riyadh that the kingdom could even be on the brink of bankruptcy. This in turn was largely due to plunging oil prices as more US shale oil hit global markets and as the US jockeyed with Saudi Arabia and Russia to eventually take the top global oil producer spot. To regain a semblance of control over global oil markets that it had commanded for decades, Saudi Arabia was forced to turn to legacy oil producer Russia to form the OPEC+ group of producers in 2017, in essence changing global oil market dynamics forever.

However, the reality that Saudi Arabia and OPEC need higher oil prices to support their outsized budgets seems to be lost on Donald Trump. Last week, the Republican presidential nominee accused OPEC of manipulating oil prices to help Democratic frontrunner Vice President Kamala Harris win in the November election. While there’s little doubt that if elected Trump would pass pro-oil industry legislation that would see even more US oil production that would cut deeper into OPEC profits, it is shortsighted to indicate that the cartel is driving down oil prices to help a US presidential candidate. Rather, it’s simple oil market supply and demand fundamentals at play.