China buffers the global energy supply shock through inventory drawdowns and substitution toward coal and renewable energy

Overview

The report analyzes changes in China's energy balance since the Middle East conflict and the Hormuz shock. As one of the largest importers of energy products typically shipped through Hormuz, China sharply reduced net fossil fuel imports, thereby acting as a demand-side buffer in global oil and gas markets. Despite reduced external energy supply and higher energy prices, China's total energy demand still grew 0.4% year over year in April-May, while annualized real GDP growth on a quarter-over-quarter basis slowed from 5.3% in Q1 to 3.6% in Q2, with the slowdown partially cushioned by inventory drawdowns and energy substitution.

Core views

Goldman Sachs presents three core judgments: first, China mainly offset the import decline through effective drawdowns of coal, crude oil, and natural gas inventories rather than higher domestic fossil fuel production; second, greater use of coal, renewable energy, and electricity limited broader energy demand destruction, while higher EV penetration shifted part of transport energy use from gasoline to electricity; third, output contraction was concentrated in industries unable to easily substitute away from oil and gas inputs, while industries with more flexible energy sourcing or greater reliance on electricity were more resilient.

Analysis framework

The report starts from a breakdown of the energy supply-demand balance, attributing percentage-point contributions to year-over-year growth in total energy demand from crude oil, natural gas, coal, inventory use, renewable energy, and end-use electricity demand, and combines this with indicators such as traffic congestion, EV charging, gasoline consumption, and industrial output to verify the actual performance of fuel substitution and industrial impacts.

Methodology notes

• Energy balance attributionBreakdown of percentage-point contributions to year-over-year growth in total energy demand

  By dividing the year-over-year change in demand or supply for each energy type by average total energy demand in April-May 2025, the report derives each type's percentage-point contribution to total energy demand growth.

  The report uses this method to measure the positive and negative contributions of import declines, domestic production, inventory drawdowns, coal, renewable energy, oil products, and natural gas to China's total energy demand growth.

• Counterfactual estimationAverage energy demand growth benchmark for 2014-2023

  The 3.1% average annual growth in year-end energy balance over 2014-2023 is used as a rough benchmark for a no-shock scenario.

  Applying this growth rate to average monthly energy consumption in April-May 2025, the report estimates counterfactual energy demand growth of about 375 PJ in April-May 2026; actual growth was 52 PJ, implying about 323 PJ of demand destruction.

• Inventory use estimationEffective inventory drawdown

  Effective inventory drawdown is defined as the difference in inventory withdrawals or reduced inventory builds in April-May 2026 relative to the same period in 2025.

  Coal inventories come from SX Coal, natural gas inventory injections are estimated by SIA; crude oil inventories are less transparent, so the report infers them using NBS and S&P product demand, Kpler and PetroLogistics net imports, and IEA production data.

Asset mapping & comparison

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

• Crude oil

  China's net imports fell sharply, making crude oil the core asset in demand-side adjustment under the supply shock.

  Strengths

  Inventory drawdowns contributed about 2.2 percentage points, buffering the impact of lower imports on end demand.

  Weaknesses

  Reduced oil product use dragged on total energy demand growth, and downstream industries such as refining are under output pressure.

  Comparison

  China's net crude oil imports continued to decline, while other parts of Asia had recovered to 2025 levels by June.

  Risks

  If inventory drawdowns prove unsustainable or prices continue to rise, a subsequent import recovery could again affect global oil prices.

• Natural gas and LNG

  Natural gas imports declined, but their direct drag on total energy demand was smaller than that of crude oil.

  Strengths

  Effective natural gas inventory drawdowns contributed 0.2 percentage points, partially offsetting the drop in net imports.

  Weaknesses

  Natural gas prices rose 49% year over year, and substitution capacity is limited in oil- and gas-intensive industries.

  Comparison

  Compared with crude oil and coal, the year-over-year decline in net natural gas imports was smaller, at 7%.

  Risks

  If the LNG market tightens again or pressure to rebuild gas inventories rises, substitution room may narrow.

• Coal

  Coal played the main supporting role in both fuel substitution and inventory buffering.

  Strengths

  Effective coal inventory use contributed 3.0 percentage points, and increased coal use contributed 1.4 percentage points.

  Weaknesses

  Domestic fossil fuel production declined slightly overall, and lower coal production imposed a 0.5 percentage point drag on total energy supply growth.

  Comparison

  Coal supported the system both through reduced stockbuilding, creating effective inventory drawdowns, and through a higher usage share replacing part of oil and gas demand.

  Risks

  Overreliance on coal may bring environmental, policy, and supply-elasticity constraints.

• Renewable energy and power

  Greater use of renewable energy and electricity was an important substitution channel that reduced demand destruction.

  Strengths

  Increased renewable energy use contributed 0.8 percentage points, and EV charging growth supported transport activity.

  Weaknesses

  The report does not show that these sources can fully replace industrial demand for oil and gas feedstocks.

  Comparison

  Compared with oil- and gas-dependent industries, output in electricity-dependent industries was more stable.

  Risks

  If power systems, weather, or renewable generation become more volatile, the substitution effect may be unstable.

• Electric vehicles

  EVs increased the ability of the transport sector to switch from gasoline to electricity.

  Strengths

  Charging volumes rose 57%-62% year over year in April-June, while traffic congestion remained relatively stable.

  Weaknesses

  The substitution mainly covers transport energy use and cannot solve petrochemical feedstock and industrial dependence on oil and gas.

  Comparison

  Gasoline consumption fell significantly while transport activity did not decline by a similarly large amount, showing the buffering role of electrification.

  Risks

  If car demand, charging infrastructure, or electricity pricing conditions change, the intensity of transport substitution may fluctuate.

Key data

• China total energy demand growth in April-May, year over year+0.4%Equivalent to an increase of about 52 PJ year over year.
• Counterfactual energy demand growth benchmark+3.1%Based on the 2014-2023 average annual growth rate; implies counterfactual year-over-year growth of about 375 PJ in April-May.
• Estimated demand destructionAbout 323 PJ, about 2.7 percentage pointsActual energy demand growth was below the counterfactual path.
• Annualized real GDP growth in Q2 on a quarter-over-quarter basis3.6%Below 5.3% in Q1, mainly due to slower fiscal spending, alongside drags from energy prices and weather.
• Year-over-year change in fossil fuel net imports in April-MayCrude oil -24%, natural gas -7%, coal -24%During the same period, prices rose 59%, 49%, and 38% year over year, respectively.
• Contribution of fossil fuel net imports to total energy demand growthCrude oil -3.7 percentage points, natural gas -0.3 percentage points, coal -1.2 percentage pointsImport declines were the largest negative source of total energy demand growth.
• Contribution from effective inventory useCoal +3.0 percentage points, crude oil +2.2 percentage points, natural gas +0.2 percentage pointsInventory drawdowns were the main positive factor buffering the supply shock.
• Contribution from fuel substitutionOil products -1.6 percentage points, natural gas -0.1 percentage points, coal +1.4 percentage points, renewable energy +0.8 percentage pointsCoal and renewable energy offset part of the decline in oil and gas use.
• Gasoline consumption and EV chargingApril-June gasoline consumption -23%/-23%/-21% year over year, EV charging +62%/+60%/+57% year over yearThe traffic congestion index fell 1.2% year over year in April and rose 0.2% and 2.1% in May and June, respectively.
• Output in oil- and gas-dependent industriesRefining -10.9%, sulfuric acid -4.6%, chemical fiber -3.7%All are year-over-year changes in physical output in Q2.
• Output in industries more reliant on electricityCaustic soda +2.4%, electric vehicles +17.0%Showing that electricity-dependent activities were relatively more resilient.

Impact & implications

For global energy markets, China's reduction in crude oil and natural gas imports lowered external procurement demand during the shock period, helping to buffer pressure on oil prices and LNG markets; for China's macro economy, inventories and substitute energy reduced total demand destruction, but the buffer was not costless, as physical output in oil- and gas-dependent industries has already declined noticeably. Over the medium term, electrification, coal availability, and renewable energy growth enhance the resilience of China's energy system to shocks, but inventory sustainability, fossil fuel prices, and the limits of industrial substitution remain key constraints.

Risks

• The ability of inventory drawdowns to offset import declines may be unsustainable, and subsequent restocking demand could again push up import and price pressures.
• Oil- and gas-intensive industries cannot fully substitute with coal or electricity, and physical output may remain under pressure.
• Energy prices, slower fiscal spending, and adverse weather are jointly affecting macro growth, so the energy balance alone cannot explain all GDP changes.
• Crude oil inventory estimates rely on inference and third-party data and are less transparent than coal inventory data.
• If the Middle East conflict or transport risks through Hormuz persist, uncertainty will remain around global oil and gas supply and China's energy import strategy.

What to watch

• Whether China's net imports of crude oil, natural gas, and coal recover in Q3.
• Changes in coal and crude oil inventories, especially whether effective inventory drawdowns can continue to support demand.
• Whether the divergence among gasoline consumption, EV charging volumes, and the traffic congestion index persists.
• The divergence in output among refining, chemical fiber, sulfuric acid, ethylene, caustic soda, and electric vehicles.
• Whether renewable power generation and electricity demand can continue to offset the oil and gas supply gap.
• Year-over-year increases in energy prices and their marginal impact on industrial production and GDP growth.