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SUV boom bolsters Chinese oil demand

Despite a slowing economy, some bullish forecasters predict China’s oil demand will be stronger for longer as transportation, rather than industrialisation, spurs growth

Analysts at Bernstein Research remain bullish on China’s oil demand growth, forecasting 11.3 million barrels per day (b/d) by 2015, which excludes the filling of strategic petroleum reserves and is 500,000 b/d above the current consensus. China consumed 9.6m b/d in 2012.

They say demand will be driven by the population’s rising taste for gas-guzzling sports utility vehicles (SUVs), which, despite Beijing’s aggressive fuel efficiency targets, looks set to remain the fastest growing sub-segment of China’s ballooning vehicle market.

The number of vehicles on China’s roads is expected to double to more than 220m by 2020. In an attempt to ensure it does not become dependent on oil imports, Beijing is encouraging more fuel efficient, as well as alternative energy vehicles, such as electric and natural gas, but its policies have so far failed to sway Chinese drivers.

Bernstein says that Beijing’s fuel efficiency targets are not ambitious and, since they are weight based – heavier vehicles have less stringent targets to meet – they will encourage car makers to sell more SUVs, thereby offsetting any gains.

The firm’s analysis shows that the rate of improvement in fuel consumption per vehicle per day has peaked and will slow as more Chinese aspire to own an SUV, which appears to be an “unstoppable trend”.

By 2020, SUVs, which are larger and heavier than the average vehicle, could make up 20% of the passenger fleet, up from 10% today.

The Chinese love the prestige associated with owning large conventional cars, which has seen SUV sales jump from 1.7% of total passenger vehicle sales in 2000 to 15.7% last year. This is expected to hit more than 20% by 2020.

In Bernstein’s analysis, the shift towards SUVs – which consume 6.5-12.2 litres per 100 km – results in the average fuel efficiency of the fleet falling from 8.97 litres/100km in 2012 to 9.02 litres/100km in 2013 and 9.08 litres/100km in 2014.

According to the research firm’s data, there will be slower growth in vehicle efficiency ahead. They assume the average fuel efficiency for passenger vehicles drops to 8.9 litres/100km in 2015 and 8.2 litres/100km in 2020 – an overall improvement of 9%.

Rather boldly, Bernstein argues that as industrial growth looses steam, but demand for cars and trucks remains strong, oil-demand growth will not slow as much as the International Energy Agency (IEA) forecasts.

Based on Bernstein’s calculations, China’s oil demand will rise 5% per year, hitting 12.9m b/d by 2018. The IEA in its latest medium-term oil market report, sees a slower rate of growth pegged at 4% with total demand of 12m b/d in the same year. If Bernstein is right the additional demand would soak up all the extra oil expected from non-Opec producers.

This yawning gap is largely a result of differing perspectives on the fuel efficiency of passenger vehicles and km travelled per year.

IEA data shows that Chinese light vehicles travelled 11,860km per year in 2010. As more vehicles hit the road in China over the next decade, the agency estimates the average distances at 12,000km/yr, which remains below global averages.

Bernstein estimates oil demand from the transport sector will expand 7.2% from 3.8m b/d in 2011 to 7.1m b/d in 2020. Meanwhile, oil demand from other sectors will rise 2.4% from 5.4m b/d to 6.7m b/d over the period.

Demand for gasoline and diesel in both the ground and air transportation sectors now makes up 46% of total oil demand, compared with only 30% a decade ago, highlighting the growth potential. The share is expected to rise to 52% by 2020.

Consequently, China will become a net exporter of diesel and importer of gasoline, reversing historical trends, as oil demand shifts from industry to transport, which could have negative implications for regional refiners, notes Bernstein.

During the first quarter of the year, China’s apparent gasoline demand growth stood at 15.3% while apparent diesel demand edged down 1.8% year-on-year.

Preliminary Chinese government data for May showed apparent oil demand hitting a nine-month low of 9.5m b/d, which translates to growth of around 1% year-on-year, and well below the record 10.3m b/d seen last December.

The numbers suggest a slowing economy, as well as weaker oil demand expansion.

However, it appears the Chinese refiners have been running down inventories and carrying out maintenance at plants in the last couple of months, thereby depressing the oil demand figures.

But demand is expected to increase from June as the seasonal summer peak season sees more Chinese traveling and building activity accelerate.

With that in mind Bernstein predicts oil demand will pick up in the second half with full year demand growing 5.3% to 10.2m b/d. That is 200,000 b/d more than the IEA forecast for 2013.

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