Frigid temperatures expected in key consumer regions on both sides of the Atlantic in coming weeks should spur heating oil demand and draw down swollen heating oil inventories. Slack demand for distillates - which include heating oil as well as diesel - in top consumer the United States swelled inventories to 26-year highs in 2009.
After the coldest December in a decade, distillate supplies fell from more than 167 million barrels at the start of that month to 159 million barrels on January 1. That remained about 15.4 percent over year ago levels, but analysts said cold weather will help bring inventories down further.
"Winter weather has finally hit the oil market and could have a dramatic impact on the stock overhang over the next few months," J.P. Morgan's Lawrence Eagles said in a note, adding the rapid stocks fall will start to give a boost to flagging refinery margins. Cold weather in December and early January helped push crude prices to a 15-month high over $83 a barrel this week.
A consensus has emerged among weather forecasters that the current frigid temperatures in much of the United States will linger on through the end of February. J.P. Morgan estimates distillate stockpiles on land and sea in the Atlantic Basin are currently 145 million barrels over the five-year average. That level could be cut in half if forecasts for cold weather in January and February hold.
During what forecasters said was the coldest December in the United States since 2000, Goldman Sachs said distillate demand rose by 145,000 barrels per day and US total petroleum demand 305,000 bpd relative to normal December weather, and could climb further.
"Weather futures markets suggest US distillate demand will climb to 4 million (bpd) in January and February," Goldman Sachs analyst David Greely said in a report, up about 8 percent from current levels of 3.7 million bpd. Heating oil inventories in the US East Coast - which include the giant Northeast heating oil market - stood at 35.3 million barrels in the January 1 week, 24.7 percent higher than a year ago.
Across the Atlantic, freezing conditions in north-west Europe has prompted a drawdown of gas oil stocks in independent tanks in the Amsterdam-Rotterdam-Antwerp (ARA) storage hub. Traders in Europe expect more demand for heating to emerge next week with temperatures across north-west Europe forecast to remain below seasonal norms for at least the next 10 days, according to private forecaster Meteorlogix.
In Europe's ARA hub, gasoil stocks have fallen for the last two weeks but are still nearly 500,000 tonnes above last year's levels at 2.607 million tonnes, according to last week's data from Dutch oil analyst Pieter Kulsen. In September, gas oil stocks scaled to record highs of over 3 million tonnes.
In the German inland market, residential heating oil stocks were last measured at 65 percent of capacity in December and above the average 62 percent figure for 2003-2008. "The weather certainly boosts consumption at the household level," said Harry Tchilinguirian, oil analyst at BNP Paribas, but noted German end users will over the course of the cold spell rely on stocks they had replenished prior to winter.
Michael Wittner, global head of energy research at Societe Generale, said sustained, severely cold weather was likely to increase consumption by as much as 500,000 bpd - possibly even more, in the OECD, the Organisation for Economic Co-operation and Development countries. "Obviously the cold weather across the United States, Europe and China is healthy for heating fuel demand," he said.
Some analysts, however, remain cautious on the extra demand eating into inventories, saying much of the recent drawdown was due to US refiners slashing fuels production as they run below 80 percent to capacity because of the weak margins. Also, some of the floating gas oil stocks previously held in Europe are now being transferred to the United States where they will be discharged, trade and shipping sources said.
Idle refinery production capacity will continue to overhang the market "available to come back into play in the event that refinery profit margins become sufficiently attractive," said Tim Evans, analyst at Citi Futures Perspective in New York.
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