BEIJING, Aug 2 (Reuters) - China's slumping consumptionof diesel, as use of LNG-powered trucks grows, is weighing ondomestic fuel demand, with forecasters warning of further risksfrom a sluggish economy hobbled by a prolonged crisis in theproperty sector.
While the world's second largest economy was long the growthengine for global oil demand, its peaking appetite for transportfuel, as an energy transition gathers pace in a sputteringeconomy, is now dampening world markets.
In the second quarter, global oil demand growth was itsslowest since late 2022, driven by a contraction in Chineseconsumption, the IEA's July oil market report showed.
Weak demand from manufacturing and construction is expectedto persist in the second half as the world's top importer of oilgrapples with a listless real estate sector that ties up about70% of its household wealth, while external risks grow.
"China's manufacturing sector is starting to slow down -going by PMI figures - especially as its 'export-led' growthmodel is no longer tenable," said Zameer Yusof, principal middledistillates analyst at analytics firm Kpler.
"This is a function of both relatively slow worldwideeconomic growth, and also ongoing U.S. tariffs on Chinesegoods."
As gasoline use plateaus, oil demand growth in the world'ssecond-largest consumer is set to slow to just under 3% in 2024,analysts say, off the previous decade's average of 4.6% and lastyear's rebound of 11.7% from three years of COVID-19 curbs.
Four of five analysts in a Reuters survey said they expectedsecond-half diesel demand to fall, between 2% and 7% on anannual basis, to range from 3.81 million to 4.67 million barrelsper day (bpd).
The finding comes after China's oil consumption contractedin the second quarter, pushing its refiners to cut fuel outputand imports of crude.
"Diesel demand is the most sluggish sector within oil demandin the second half, with significant displacement ... in thetrucking sector," said consultant Xia Shiqing of Wood Mackenzie,which expects China's second-half diesel demand to fall about 2%to 3.93 million bpd.
As increasing numbers of LNG-powered trucks erode demand fordiesel, accelerating sales of electric vehicles suggest China'sdemand for transport fuel is nearing its peak. Gasoline anddiesel make up more than 40% of the country's oil demand.
The International Energy Agency has been revising down its2024 oil product demand forecast for China every month sinceJanuary, while consultancies such as FGE and Kpler have alsotrimmed some of their demand forecasts.
Kpler expects second-half diesel demand to grow by 4%annually, a downgrade from its previous forecast, adding that itmay further cut its forecast in future.
In a note to clients, FGE analysts said, "Despite the end ofpeak refinery maintenance, persistently weak diesel demand and aslowdown in gasoline consumption provided little incentive forrefiners to ramp up."
They added, "There is no pressing need for more supplies (ofthe fuels) in the domestic market."
FGE adjusted its diesel demand forecast downwards to a yearon year decline of 5% in the second half, versus a drop of 1.2%earlier.
SHIFT TO LNG
Conventional fuel use is slowing as sales of trucks runningon LNG soared 307% to 152,000 last year, data from Chineseinformation provider CV World showed.
An LNG-fueled truck costs about 80,000 yuan ($11,021) morethan a similarly-powered diesel truck, but fuel savings allowthe expense to be recouped in about 190 days, research firmHorizon Insights said.
Woodmac estimates fuel for an LNG heavy-duty truck costsabout 1.7 yuan a km, less than diesel's cost of 2.8 yuan. EachLNG truck displaces 13 metric tons (97 barrels) of annual dieseldemand, the consultancy said.
Kpler estimates LNG will displace 140,000 bpd of diesel inthe period from May to December, while FGE forecasts 110,000 bpdto 120,000 bpd of diesel displacement from LNG in both 2024 and2025.
LNG-based trucks could make up nearly a tenth of theheavy-duty truck fleet by 2025, say analysts at dataintelligence firm ICIS.
GASOLINE, JET FUEL
Gasoline demand, which accounts for a fifth of China's oilconsumption, is expected to expand marginally in the secondhalf, forecasts say, as EV sales continue to grow.
Rystad and Woodmac expect annual growth of 1.2% and 1%respectively, to 3.45 million bpd and 3.97 million bpd, in thesecond half, while FGE expects demand to stay flat.
Longzhong expects second-half demand to shrink 3.52% on theyear to 3.87 million bpd, as EVs accounted for nearly 40% of carsales in the second quarter.
"Gasoline demand is now at the last leg of growth and upsideis limited from next year," said Mia Geng, FGE's head of Chinaoil analysis, who forecasts consumption to plateau within 12 to18 months.
Aviation fuel is the main growth sector for China's refinedfuel use, thanks to pent-up travel demand, with analystsforecasting on-year growth of 8% to 15%, to between 870,000 bpdto 1.04 million bpd, in the second half.
The number of domestic flights is already 10% higher thanbefore the pandemic, while international flights have recoveredto 75%, WoodMac's Xia said, adding that second-half demandshould close 30,000 bpd higher than in the same 2019 period.
Although China has rolled out a raft of visa-free measuressince December to further stimulate inbound travel demand,foreign arrivals stood at just 14.6 million in the first half,online travel agency Trip.com said.
That implies bookings must more than double in the secondhalf to match 2019's figure of 49.1 million overseas visitors.
Reflecting weak demand, Chinese refinery throughput in thefirst half was down 0.4% on the year at 360.09 million metrictons (14.44 million bpd), official data showed, with Sinopec,Asia's largest refiner, cutting diesel output 8.8% as domesticsales of refined fuel fell 2.5%.
FGE expects refinery runs to drop 200,000 bpd annually inthe second half to 14.7 million bpd, while Kpler forecasts crudeintake averaging 15.9 million bpd from July to December, littlechanged from 15.81 million bpd a year earlier.
(Reporting by Colleen Howe in Beijing and Trixie Yap inSingapore; Additional reporting by Chen Aizhu and Emily Chow inSingapore; Editing by Florence Tan and Clarence Fernandez)
