China’s Falling Diesel Demand Dampens Oil Outlook
The property sector crisis and the rise of LNG use in trucking have weighed on China’s diesel demand this year, dampening the prospects of oil demand growth in the world’s top crude importer, which has been a key driver of global demand growth for years. Diesel demand in China is particularly weak and analysts expect it to remain weak for the rest of the year. With slumping diesel demand and lackluster gasoline consumption, Chinese oil demand growth is expected to be just below 3% this year compared to 2023, according to analyst estimates compiled by Reuters. To compare, China’s annual oil demand growth averaged 4.6% in the past decade and rebounded by 11.7% last year after nearly three years of COVID-related lockdowns. Gasoline demand may be plateauing, but diesel demand is outright falling, according to analyst projections. China’s diesel demand in the second half of 2024 is set to decline by between 2% and 7% on an annual basis, according to four out of five analysts in a Reuters survey. Apart from weaker-than-expected economic growth and the property crisis, Chinese diesel demand is also hit by the surge in LNG-fueled trucking, which has started to displace some diesel consumption. “Diesel demand is the most sluggish sector within oil demand in the second half, with significant displacement … in the trucking sector,” Wood Mackenzie consultant Xia Shiqing told Reuters. LNG-fueled heavy-duty vehicles are set to limit diesel use for transport, especially now that LNG is cheaper than diesel. Chinese sales of LNG trucks have been booming in recent months, as global and Asian LNG prices are much lower than the record highs seen at the peak of the energy crisis in the summer of 2022. The prospect of abundant new LNG supply coming to the market after 2026, especially from Qatar’s huge expansion projects, makes analysts optimistic about the acceleration of the Chinese LNG-fueled truck market as growing LNG supply could keep prices low enough to continue displacing diesel.
Oil Prices Set for Another Weekly Loss Despite War Premium
Despite a surge in oil prices this week on expectations of a major escalation in the Middle East, the benchmarks were set for their fourth weekly loss in a row as demand concern outweighed the war premium. Both Brent crude and West Texas Intermediate were up earlier in the day, but overall prices were down on last week, with Reuters citing a survey revealing a slowdown in manufacturing activity across most of the world and the third annual road traffic decline in China. PMI readings for July showed a slowdown in activity in Asia, Europe, and the United States, with the U.S. drop especially steep, reaching the lowest in eight months on a decline in new orders, to a reading of 46.8. The eurozone was doing even worse, with PMI across the single-currency bloc logging a reading of just 45.8 in July. The figure was unchanged from the previous month but still rather weak, prompting an inference of lower energy consumption and, by extension, lower oil consumption. China was doing better in manufacturing activity but its July reading also showed a sub-50 PMI, meaning a contraction, which automatically affects oil prices due to China’s status as the world’s largest importer of the commodity. On the bullish side, besides the escalation risk in the Middle East, the EIA surprised many by reporting stronger-than-expected domestic oil demand for May. While this will not affect prices per se, it might spark expectations of stronger than initially believed oil demand growth through the rest of the year. Despite the weakness in prices, however, some traders have started betting on Brent not just going higher but breaking through $100 per barrel. Bloomberg reported that on Wednesday alone, 300,000 crude oil call options were traded—the highest single-day volume since April. It seems concern about demand prevailed, with Brent losing most of what it gained earlier in the week to trade barely above $80 per barrel earlier in the day.
Govt. slashes windfall tax on petroleum crude to Rs 4,600 per tonne, price to be effective from Aug 1
The government on July 31 slashed windfall tax on domestically produced crude oil to Rs 4,600 per tonne from Rs 7,000 per tonne. The tax is levied in the form of Special Additional Excise Duty (SAED). The SAED on the export of diesel, petrol and jet fuel or ATF has been retained at nil. The new rates will be effective from August 1, an official notification said. India first imposed windfall profit taxes on July 1, 2022, and joined a host of nations that tax supernormal profits of energy companies. The tax rates are reviewed every fortnight based on average oil prices in the previous two weeks. From July 2022, India started taxing crude oil production and exports of gasoline, diesel and aviation fuel to regulate private refiners that wanted to sell fuel overseas instead of locally to gain from robust refining margins. The government raised the windfall tax on petroleum crude to Rs 7,000 per metric tonne from Rs 6,000 per tonne on July 15. The new rates will be effective from July 16. Earlier on July 1, the government has increased windfall tax on domestically-produced crude oil to Rs 6,000. This measure was introduced to control private refiners who preferred selling fuel internationally to capitalise on strong refining margins instead of supplying it domestically.