NEW YORK (Reuters) - China's diesel demand fell by 11% year over year to 3.9 million barrels per day in June, the biggest percentage drop since July 2021, the U.S. Energy Information Administration said on Thursday.

WHY IT'S IMPORTANT

Sluggish fuel demand in China has weighed heavily on oil markets this year, unnerving market participants who had bet the world's second-largest economy will continue to be a growth engine.

The Organization of Petroleum Exporting Countries lowered its 2024 oil demand forecast this week citing softer expectations for China, the first cut since the outlook was published over a year ago. Paris-based International Energy Agency cut its 2025 forecast, also citing a weak Chinese economy.

CONTEXT

Diesel consumption reached an all-time high in China last year but demand has dropped sharply since the second quarter this year, according to the EIA.

The slump is largely due to two factors: the country's ailing property sector has slowed economic growth; and liquefied natural gas is replacing diesel in heavy-duty trucks, the EIA said.

"Aside from less use of diesel because of slowing economic activity in the construction and property sectors, a small but growing share of China's trucking fleet is using LNG instead of diesel for fuel," the EIA said.

BY THE NUMBERS

Sales of trucks running on LNG soared 307% to 152,000 last year, data from Chinese information provider CV World showed. Consultancy FGE estimates LNG will displace 110,000 to 120,000 bpd of diesel demand in China this year and next.

Chinese refineries have struggled against this backdrop. Oil refinery output in July fell 6.1% from a year ago according to official data, down for a fourth consecutive month.