China’s June PE Utilization Rate Rises, but Oil Product Demand Continues to Worsen

Overview

This report by J.P. Morgan tracks the escalating situation in the Middle East, focusing on shifts in energy supply and demand across China and Asia. The key finding is that while China’s polyethylene (PE) utilization rate showed signs of recovery in June, overall apparent petroleum product demand continues to deteriorate, particularly as transportation fuel demand faces structural challenges from the high penetration of new energy vehicles. The report concludes that among the 3mbd of demand destruction in China, the chemical segment is temporary, whereas the transportation fuel component may be permanent. The firm maintains an Overweight rating on China’s upstream exploration and production players (e.g., PetroChina) and select chemical leaders (e.g., Nan Ya Plastics, LG Chem).

Core views

Demand side: China’s oil demand is accelerating downward. Apparent demand fell 10.6% year-on-year in May, and high-frequency data suggest the decline could widen to 19% in June, with cumulative demand losses of 3.6mbd from February to June. The composition of demand destruction is shifting: early disruptions were driven primarily by chemical feedstocks (LPG/naphtha), but recently transportation fuels (gasoline/diesel) have become a larger share. This is largely attributable to China’s NEV fleet penetration reaching 15%, with passenger car and heavy truck sales penetration further rising post-conflict. Consequently, the report has revised down the compound annual growth rates for gasoline and diesel demand through 2030 to -6% and -4%, respectively. Supply and inventories: China’s crude oil imports plummeted by 4.8mbd between February and May, with May imports falling to 7.8mbd—the lowest level since December 2017—largely offset by drawdowns in domestic inventories (a 16 million-barrel draw in May). Vessel tracking data indicate imports remained around 8mbd in June. However, as traffic through the Strait of Hormuz normalizes and chemical demand rebounds, China is expected to resume purchasing for its Strategic Petroleum Reserve (SPR) in August–September, potentially lifting import volumes. Chemicals and refining: China’s PE utilization rate has recovered from April’s low of 73% to 79% in June, thanks mainly to substituting U.S. supplies for missing Middle Eastern LPG/naphtha. Meanwhile, Asian refining margins remain under pressure from weak demand and export restrictions; local refineries (Teapots) saw utilization fall from 58% in May to 53% in June, facing structural headwinds. Should Iranian crude re-enter the market, these local refiners may lose their discounted-feed advantage. Investment recommendations: In the exploration and production (E&P) space, PetroChina is favored, with an estimated first-half 2026 dividend of RMB 0.27 per H-share (annualized yield of 6.4%), outperforming Sinopec. In chemicals, Nan Ya Plastics is the top pick; if it secures M9/M10 CCL customer certification by late 2026/early 2027, its valuation could be re-evaluated. For lagging names benefiting from lower oil prices and improving energy storage demand, LG Chem is viewed favorably.

Analysis framework

The report employs a combined approach of high-frequency data tracking and structural decomposition. First, it quantifies short-term fluctuations in China’s crude oil imports and apparent demand using NBS data and vessel-tracking information, distinguishing between “temporary” disruptions (inventory adjustments, chemical maintenance) and “permanent” ones (NEV substitution). Second, it uses capacity utilization metrics (e.g., PE operating rates) and refining margin indicators to assess the extent of supply-side adjustments. Finally, it incorporates policy factors (export quotas, electricity price controls) and geopolitical considerations (Strait of Hormuz traffic, damage to Middle Eastern infrastructure) to conduct scenario analysis, thereby identifying defensive plays (high-dividend upstream) or structurally growing opportunities (new energy materials, high-end chemicals).

Methodology notes

• Industry / sector analysisSupply-demand framework

  供需平衡表分析

  By disaggregating changes in imports, production, inventories, and apparent consumption, the framework identifies whether demand fluctuations stem from short-term inventory adjustments or long-term structural shifts.

• Event games & behavioral finance

  地缘政治风险传导机制

  Analyzes how Middle East conflicts propagate to Asian countries’ energy costs and inflation levels via supply chain disruptions (e.g., blockades of the Strait of Hormuz) and policy responses (e.g., export bans, price controls).

• Industry / sector analysisSubstitution effect

  新能源车对传统燃油的替代

  Quantifies the permanent erosion of gasoline and diesel demand caused by rising NEV penetration, a critical variable for determining peak oil demand and long-term growth trajectories.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• PetroChina (0857.HK)

  受益

  Strengths

  High dividend yield (6.4% annualized for H-shares), large upstream exposure, benefits from geopolitical premiums

  Comparison

  Outperforms Sinopec (4.8% annualized dividend for H-shares)

  Risks

  Sharp declines in oil prices

• Nan Ya Plastics (1303.TW)

  受益

  Strengths

  Leading chemical company; potential valuation re-evaluation if it secures M9/M10 CCL certification

  Comparison

  Preferred choice in the chemical sector

  Risks

  Certification progress falls short of expectations

• LG Chem (051910.KS)

  受益

  Strengths

  Benefits from lower oil prices and improving demand for energy storage systems (ESS)

  Comparison

  Viewed as a lagging catch-up play

  Risks

  Intensified competition in the battery market

• CATL (3750.HK), LG Energy Solution (373220.KS), Samsung SDI (006400.KS)

  受益

  Strengths

  Direct beneficiaries of the continued rise in NEV penetration

  Comparison

  All benefit from the EV trend

  Risks

  Global EV demand growth slows

Key data

• 中国5月表观石油需求同比变化-10.6%Widened from April’s 5% decline
• 中国6月表观石油需求同比预估-19%High-frequency data point to further deterioration
• 中国PE利用率79%Rebounded from April’s low of 73%
• 中国5月原油进口量7.8 mbdLowest since December 2017
• 中国石油2026H1预估每股分红0.27 RMBAnnualized dividend yield of approximately 6.4% for H-shares

Impact & implications

For upstream companies, despite near-term demand weakness, geopolitical premiums and high dividends provide support; PetroChina is favored due to its generous payouts and strong upstream exposure. For chemical firms, the differentiated nature of demand destruction means those with high-end product certifications (e.g., Nan Ya Plastics) or benefiting from the new energy transition (e.g., LG Chem) stand to see their valuations re-assessed. Refining, particularly local Teapot refineries, faces a double whammy of export constraints and uncertainty over access to cheap feedstocks, squeezing profit margins. At the macro level, Asian governments have delayed inflation pass-through through electricity and fuel price controls, but this may lead to balance sheet pressures or increased fiscal burdens for utilities in the future.

Risks

• Further escalation of the Middle East situation leading to a prolonged closure of the Strait of Hormuz
• A slowdown in global economic growth further contracting oil demand
• Uncertainty over the timing of China’s lifting of the ban on refined oil exports
• Phasing out of government subsidies in Asian countries, resulting in sharp increases in electricity and fuel prices

What to watch

• Whether China resumes purchases for its Strategic Petroleum Reserve (SPR) in August–September
• Whether the ban on general trade exports of refined oil products in China is lifted
• Progress on Nan Ya Plastics’ M9/M10 CCL customer certification
• The pace of crude oil flow resuming through the Strait of Hormuz