© Reuters. FILE PHOTO: A view of the city skyline and Huangpu river in Shanghai, China February 24, 2022. Picture taken February 24, 2022. REUTERS/Aly Song/File Photo

By Andrew Hayley

BEIJING (Reuters) – China’s muted economic growth in 2023 as its post-COVID recovery underwhelms has crimped the outlook for demand for diesel fuel, the oil product that is the lifeblood of the economy, paving the way for continuing firm exports.

Lower forecasts of Chinese diesel consumption further illustrate the struggles of the world’s second-largest economy and oil consumer to regain its footing following the pandemic. With equipment idling as construction slows and dwindling exports curb manufacturing, diesel demand is likely to ebb.

Rystad Energy lowered its forecast for China’s diesel demand for July to December this year to 3.81 million barrels per day (bpd) from an earlier outlook of 3.9 million bpd, though the new forecast is up 3.8% from the first half of 2023.

The International Energy Agency (IEA) expects China’s gasoil consumption in the second half of the year to fall by 150,000 bpd from second quarter levels, it said in its August oil market report.

“Diesel demand is still growing, but at a lower-than-expected rate,” said Lin Ye, a Beijing-based downstream analyst at Rystad, citing the ailing property sector and deteriorating trade environment.

Diesel accounts for the largest volume of fuel produced by Chinese refiners, making up 4.3 million bpd of fuel output in July, or 28.2% of total throughput, according to official data.

Amid a slew of disappointing Chinese economic data, analysts have lowered their full-year outlooks for diesel usage as well. Since March, the IEA has cut its 2023 forecast by 127,000 bpd. Rystad reduced its estimate by 94,000 bpd this month.

The weakness is expected to persist into next year, with the IEA in June forecasting that 2024 demand would grow by only 50,000 bpd, or 1.4% higher than 2023.

With Chinese refiners still operating at high rates, excess supply has flowed into stockpiles. Diesel inventories rose 9% from January to 15.96 million metric tons in June, according to data from China-based consultancy Longzhong. This is similar to levels in the third quarter last year when China underwent widespread COVID lockdowns.

“The lukewarm performance of the wider economy and reports of rising inventories suggest that much of the spike in refinery diesel and gasoline output went into domestic product stocks,” the IEA said.

An uptick in Chinese diesel demand earlier this year, driven by resurgent road freight transport in the first quarter, has lost momentum.

The challenges facing China’s refiners reflect deeper systemic issues.

The country’s property sector, which typically consumes large amounts of diesel for construction equipment and machinery, has been the primary limiting factor in demand growth, with new real estate construction in June down 71.7% from the monthly average in 2019.

China’s exports plunged 14.5% in July, falling at the fastest pace since the onset of the pandemic in early 2020, customs data showed, with a knock-on effect on the diesel-hungry manufacturing sector, which has seen successive months of worsening sentiment after an initial-post COVID rebound.

“Weak external demand due to global economic downturn (and) slower-than-expected recovery in manufacturing are also expected to continue to weigh on diesel demand,” said Xia Shiqing, an oil and chemicals consultant at Wood Mackenzie.


Chinese refiners have taken advantage of high profit margins for diesel in Asia by more than tripling their overseas exports of the fuel during the first half of the year compared to 2022.

However, continued exports are subject to the issuance of new export quotas from Beijing.

August diesel exports are estimated at 650,000 to 800,000 tons, down from July’s estimate of 1 million tons, data compiled by consultancy Longzhong and China-based trading analysts showed.

So far for 2023, China has issued 27.99 million tons of oil product export quotas. Refiners have used up 98% of the quotas issued, with 33% of the quotas used for diesel exports, according to Reuters calculations based official government export data and estimates from consultants and analysts for July and August shipments.

Beijing is expected to issue new quotas for the rest of 2023, with Mia Geng, the head of China oil analysis at consultants FGE predicting up to 8 million tons of new licences by September.

“Although it is possible that the government allows more than this to give refiners room to raise exports in (the fourth quarter),” she said.


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