China buffers the global energy supply shock through destocking, fuel substitution and industrial adjustment

Overview

The report analyzes changes in China’s energy balance since the Middle East conflict. As the largest importer of energy products typically transported through the Strait of Hormuz, China significantly reduced net fossil-fuel imports during the shock, thereby acting as a demand-side shock absorber in global oil and gas markets. Despite the economic pressure from lower imports and higher energy prices, China’s total energy demand still increased slightly by 0.4% year over year in April-May, while Q2 real GDP growth at an annualized quarterly rate declined from 5.3% in Q1 to 3.6%.

Core views

The core views are threefold. First, China offset declines in imports and production through effective destocking of coal, oil and natural gas, particularly as coal inventory replenishment slowed and oil destocking accelerated. Second, increased use of coal, renewables and electricity substituted for some oil and gas demand, reducing broader energy demand destruction. Third, output adjustments were concentrated in industries highly dependent on oil and gas, while industries with flexible energy sources or greater reliance on electricity performed more steadily.

Analysis framework

The report uses an energy-balance decomposition, breaking down total energy demand growth into contributions from domestic production, net imports, inventory use and different energy sources. It also uses traffic congestion, gasoline consumption, EV charging volume and physical industrial output indicators to observe how the energy shock transmitted through consumption and production.

Methodology notes

• energy_balance_decompositionEnergy supply-demand balance decomposition

  Decomposes energy demand growth into contributions from production, net imports, inventory use and changes in the fuel mix.

  The report measures each component’s contribution to China’s year-over-year total energy demand growth in percentage points, and estimates inventory use for oil products, coal and natural gas using data from Kpler, PetroLogistics, the IEA, the NBS, S&P, SX Coal and SIA.

• counterfactual_analysisCounterfactual demand growth estimate

  Uses historical average total energy demand growth to estimate the potential demand path in the absence of a supply shock.

  The report uses the 2014-2023 average annual total energy demand growth of +3.1% as the counterfactual baseline, estimating potential year-over-year growth of approximately 375 PJ in April-May. Compared with the actual increase of 52 PJ, this implies approximately 323 PJ of demand destruction.

• sector_sensitivityEnergy input sensitivity analysis

  Explains differences in output according to industries’ dependence on oil, natural gas, electricity or coal.

  The report compares output of crude processing, sulfuric acid, synthetic fibers, ethylene, caustic soda and EVs, concluding that oil- and gas-intensive industries experienced more pronounced output cuts, while industries reliant on electricity or able to switch to coal-chemical pathways were more resilient.

Asset mapping & comparison

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

• Crude oil

  A sharp decline in China’s net imports and faster inventory use make crude oil the core demand-side buffer amid the global supply shock.

  Strengths

  Inventory releases and partial demand substitution reduced short-term import demand, cushioning the impact of the shock on global oil prices.

  Weaknesses

  The high cost of production at mature domestic oilfields has kept crude production broadly flat, making it difficult to offset lower imports through higher output.

  Comparison

  While crude imports in other parts of Asia recovered to 2025 levels by June, China’s imports continued to decline through the first half of July.

  Risks

  Inventory sustainability is limited; if import constraints persist, refining and downstream chemicals could remain under pressure.

• Natural gas

  The decline in net imports was smaller than for crude oil and coal, but prices rose significantly year over year and weighed on total energy demand growth.

  Strengths

  Natural-gas inventory use still made a small positive contribution to total energy demand.

  Weaknesses

  It has pressured industries dependent on natural-gas feedstock or fuel, with substitution capacity depending on processes and infrastructure.

  Comparison

  The shock was smaller than for crude oil, but the price increase was still as high as 49% YoY.

  Risks

  If tightness in the LNG market persists, cost and output pressures on gas-intensive industries could increase.

• Coal

  Coal was both a fuel whose net imports declined during the shock and an important domestic energy source substituting for oil and gas.

  Strengths

  Slower inventory replenishment created effective destocking, contributing approximately +3.0pp to total energy demand growth; coal-chemical pathways supported the recovery of some chemical-product output.

  Weaknesses

  Domestic coal production declined year over year in April-May, constraining supply resilience.

  Comparison

  Coal and renewables together offset part of the decline in oil and gas use.

  Risks

  If coal inventories or production are constrained, coal’s ability to substitute for oil and gas will weaken.

• Renewables and electricity

  Increased renewable-energy and electricity use was an important substitute that reduced oil and gas demand destruction.

  Strengths

  Renewables contributed approximately +0.8pp to total energy demand growth, while strong growth in EV charging helped maintain stable transport activity.

  Weaknesses

  Substitution mainly occurs in applications that can be electrified, with limited ability to replace oil and gas as chemical feedstocks.

  Comparison

  Compared with declining oil-product demand, electricity and EV charging data demonstrate greater resilience.

  Risks

  The power grid, charging infrastructure and fluctuations in renewable generation could affect the sustainability of substitution.

• EV supply chain

  EVs are both a vehicle for transport-energy substitution and a resilient industry more dependent on electricity than on oil and gas inputs.

  Strengths

  EV production increased 17.0% year over year in Q2, while year-over-year charging growth remained at 57%-62% from April to June.

  Weaknesses

  Seasonally adjusted total vehicle sales may not have expanded in tandem; some of the growth may reflect structural substitution.

  Comparison

  Compared with the sharp decline in gasoline consumption, the traffic congestion index fluctuated only slightly, indicating that EV substitution cushioned transport activity.

  Risks

  If consumer demand for vehicle purchases or charging infrastructure development slows, the pace of substitution may decline.

Key data

• China total energy demand growth+0.4% YoYApril-May 2026 average; up approximately 52 PJ year over year.
• Q2 real GDP growth3.6% quarterly annualizedBelow Q1’s 5.3%, due to fiscal drag, higher energy prices and adverse weather.
• Change in net imports of crude oil, natural gas and coal-24% / -7% / -24% YoYApril-May 2026 average.
• Change in crude oil, natural gas and coal prices+59% / +49% / +38% YoYOccurred alongside declining net imports, reflecting the price shock.
• Inventory-use contributionCoal +3.0pp, oil +2.2pp, natural gas +0.2ppContribution to year-over-year total energy demand growth.
• Fuel-substitution contributionOil products -1.6pp, natural gas -0.1pp, coal +1.4pp, renewables +0.8ppContribution to year-over-year total energy demand growth in April-May 2026.
• Gasoline consumption and EV chargingGasoline consumption down 23% YoY in April-May, EV charging volume up 60% YoYShows substitution of gasoline with electricity for mobility.
• Q2 crude processing volume-10.9% YoYReflects the impact of lower oil-product inputs on oil- and gas-dependent industries.
• Q2 EV production+17.0% YoYIndustries more dependent on electricity than on oil and gas inputs performed more resiliently.

Impact & implications

China’s reduction in fossil-fuel imports has two implications for global energy markets. On the one hand, it buffers the price pressure from the Strait of Hormuz shock in LNG and especially crude oil markets. On the other hand, China’s ability to absorb the shock through inventory drawdowns and fuel substitution is not unlimited. If high prices or import constraints persist, the drag on industrial output and macroeconomic growth could become more pronounced as the inventory buffer weakens.

Risks

• Fossil-fuel inventory releases cannot be repeated indefinitely, and the marginal inventory buffer may decline going forward.
• Persistently high energy prices could further weigh on GDP, industrial output and end demand.
• Oil- and gas-dependent industries such as refining, sulfuric acid and synthetic fibers may continue to face declining physical output.
• If coal, renewables or electricity substitution is constrained by supply, weather or the power grid, demand destruction could widen.
• The report relies on estimates of otherwise unobservable oil-product inventories, creating uncertainty around the extent of inventory use.

What to watch

• Whether China’s seaborne and pipeline net crude imports remain below 2025 levels.
• Changes in coal, crude oil and natural-gas inventories and whether the pace of destocking slows.
• Whether the divergence among gasoline consumption, EV charging volume and the traffic congestion index persists.
• Monthly physical output of refining, synthetic fibers, sulfuric acid, ethylene, caustic soda and EV industries.
• Developments in the Middle East, transport risks through the Strait of Hormuz and their transmission to LNG and crude oil prices.
• Whether China’s year-over-year total energy demand growth improves from or weakens relative to April-May’s +0.4%.