Oil Market Faces Long-Term Pressure As China Pushes for Clean Energy Solutions

China’s energy transition is rapidly reshaping its oil demand as the country shifts towards electric vehicles and LNG-fueled trucks, leading to a slowdown in oil consumption growth. This is causing a decline in global oil demand due to cleaner energy adoption and economic challenges. The penetration of electric vehicles and the growing use of LNG in heavy transportation sectors are reducing the demand for traditional fuels. This article explores the fundamental and technical outlook to forecast the future direction of the oil market.

Is the Energy Transition Reshaping China’s Oil Demand?

The slowdown in China’s oil demand growth is primarily driven by weaker economic performance. The shift toward electric vehicles and LNG-fueled trucks reshapes the global oil market. Before the Covid-19 pandemic, China’s oil demand grew by 500,000-600,000 bpd annually, but this figure has now dropped to about 200,000 bpd. The reduced growth is primarily due to the penetration of electric vehicles and the increasing use of LNG in trucking, which has lowered demand for diesel, particularly in heavy transportation. This transition signals a potential long-term shift in China’s energy consumption pattern, reflecting its push towards cleaner and more sustainable energy sources.

Moreover, China’s economic crisis has supported the decline in diesel demand. While the country remains the world’s largest oil importer, the drop in diesel use points to weakening industrial and construction activities. The property sector, a significant driver of economic output, is also experiencing sluggish growth. The significant infrastructural changes in China’s transportation sector due to adopting cleaner energy vehicles indicate that some of this diesel demand may never fully recover.

The broader implications for global oil markets hinge on whether China’s economic recovery can reignite its oil consumption. Oil prices may see upward pressure if China stimulates its economy aggressively, but for now, the outlook suggests limited growth in oil demand. Industry executives at the APPEC conference in Singapore remain cautiously optimistic, noting that while demand is currently weak, it is far from negligible. China’s transition toward a greener economy does not mean an immediate decline in oil consumption but rather a gradual rebalancing.

As China shifts more heavily towards electric vehicles and LNG trucks, there are growing expectations that gasoline demand will peak this year or next. This transition is not happening due to reduced mobility but because of the increasing electrification of the vehicle fleet. According to Vitol Group’s CEO, the gradual transition to electric vehicles is a critical factor that will shape gasoline demand in the coming years. The anticipated decline in gasoline demand will likely impact refineries and oil traders depending on the Chinese market. However, Vitol’s forecast that global peak oil demand will not occur until after 2030 indicates that this is a long-term transition rather than an immediate collapse in demand.

According to projections from the China National Petroleum Corporation, the energy transition in China is not limited to gasoline but also impacts diesel consumption, which could peak as early as next year. The forecast assumes that China’s switch to cleaner energy solutions, such as LNG and electricity, will accelerate. Therefore, the demand for oil products will likely stagnate or decline in the coming years. This trend reflects the broader global shift toward reducing reliance on fossil fuels, which has significant implications for oil-producing countries and companies traditionally relying on China’s robust energy appetite.

The oil market also reacts to weather-related disruptions, such as evacuating oil platforms in the U.S. Gulf of Mexico due to hurricanes. Oil companies like Chevron, ExxonMobil, and Shell have paused operations, which could lead to short-term supply disruptions and price fluctuations. Such events, combined with long-term demand trends like those in China, create a volatile market where prices may fluctuate due to immediate supply constraints but remain under pressure from the broader global shift toward greener energy solutions. This dynamic illustrates the complexity of balancing short-term supply shocks with long-term structural changes in demand, which will continue to shape oil prices.

Oil Potential Breakdown After a Decade

The technical picture for the Brent Crude oil market is currently in a pivotal area, signalling a potential breakdown. The monthly chart for Brent crude oil, discussed in a previous article, is now breaking out of a symmetrical triangle, which may trigger a significant decline in the market. This breakout will only be confirmed if the price closes below $72 in September 2024. Historically, similar patterns were observed, and a breakout from a symmetrical triangle in September 2014—exactly a decade ago—led to a sharp drop in Brent crude oil prices to $27.10. Interestingly, this event is repeating after a decade, and if the price breaks the symmetrical triangle again, it could continue to fall toward much lower levels. Interestingly, the RSI during the September 2014 breakout was also similar, with the price positioned within the red channel.

To further understand September’s price behaviour, the weekly chart below shows that last week’s oil prices closed below the decision line discussed in the previous article. The weekly close below this line suggests that oil is likely to remain under pressure and may break the September cycle below $72. The double top formation at $139.13 and $125.19 further supports the bearish outlook, indicating that downward pressure is likely to continue. Moreover, the RSI on the weekly chart does not indicate a rebound yet, and therefore, another week of decline is expected to trigger a strong bearish pattern.

The short-term price action also indicates bearish pressure, but the price is approaching the support level of the channel lines. The RSI suggests that if the price finds support, it may rebound in the short term. However, any short-term rally could present another selling opportunity.

The analysis discussed above suggests that the global shift towards electric vehicles and energy transition strategies driven by government policies in many countries is significantly impacting oil demand. This trend is also reflected in the technical charts, with prices under extreme pressure, breaking down after one decade of the September 2014 event. If the price closes below $72 in September 2024, it will break the current pattern and could trigger a sharp decline in the oil market, similar to what occurred in the last quarter of 2014.

Conclusion

In conclusion, China’s shift toward electric vehicles and LNG-fueled trucks is reshaping the oil demand. Economic challenges in the industrial and construction sectors are further reducing diesel consumption. This suggests an infrastructural change that may prevent a full recovery in oil demand. Global oil markets remain volatile due to supply disruptions and weather events. However, the long-term outlook points to a gradual decline in oil demand as cleaner energy gains prominence. This transition aligns with global efforts to reduce fossil fuel reliance. From a technical perspective, the oil market remains under pressure, and a monthly close below $72 will trigger a strong decline. The broader impact on global markets will depend on China’s economic recovery and the pace of its energy transition.