For crashing oil market, tardy winter is cold comfort
NEW YORK – Winter has finally arrived in large swathes of the northern hemisphere after the warmest December on record took a big bite out of seasonal heating fuel demand, swelling stockpiles and pressuring oil prices as they spiraled below $30 a barrel.
January’s cooler temperatures may be less supportive than heating oil providers and bloodied oil bulls had hoped. Many homes still have full tanks.
“Everybody filled up in the warm weather when the price was lower,” Frank Lutfi, manager of small, Brooklyn, New York-based heating fuel distributor Admiral Energy, said last week.
Business for his three-truck fleet in early January was 50 percent less than a year ago, even though a measure of demand shows the temperatures were more than 30 percent colder than in December.
The season’s first major snowstorm bearing down on the U.S. East Coast this weekend could boost demand enough to cut a bit from the biggest regional supply overhang for this time of year since 2007.
Regional inventories of distillate used to make both diesel motor fuel and heating oil stand 25 percent above the 10-year average.
In Germany, another major seasonal consumer of fuel for heating, temperatures have averaged a hair above zero degrees Celsius this month, a tad colder than the 0.6 deg C norm for the month through Jan. 19, according to data compiled by ThomsonReuters. The data show December temperatures averaged 7.5 degrees Celsius, far higher than the 2 deg C norm.
South Korea and Japan, major swing users, are in the midst of a colder than usual spell, expected to last until month’s end, with temperatures several degrees below Celsius, according to weather data.
The winter weather may add as much as 1 million barrels per day (bpd) to global consumption this month, based on the traditional seasonal swing in heating oil demand. That would be enough to temporarily staunch a global supply surplus that was running at twice that for much of 2015.
Heating oil futures on the New York Mercantile Exchange HOc1, which tend to peak in January or February, have fallen 31 percent since the beginning of December to trade around 90 cents per gallon HOc1 on Thursday.
SWINGING THE WRONG WAY
The winter chill has surprised some forecasters who had expected that the most severe El Nino phenomenon in decades would extend its warming effect well into 2016. Many in the oil market believe the weather factored into a near 45 percent dive in crude prices since early November.
“It clearly would have been bearish if January had come on really warm as well,” said Paul Horsnell, head of commodities research at Standard Chartered.
Amrita Sen, Chief Oil Analyst at Energy Aspects, estimated that the market lost 800,000 to 1 million bpd of demand during November and December. Bank of America-Merrill Lynch analysts put the losses at 400,000 bpd in the United States and Europe.
It will have to get much colder for much longer to counteract the impact of a warm December.
In the United States, where heating oil demand is concentrated in the Northeast, the number of heating degree days, the number of degrees a day’s average temperature is below 65 degrees Farenheit (18 degrees Celsius), was 30 percent below normal in December.
In January, there were 530 heating degree days in the United States through Jan. 18, just 3 percent below normal. Normally, households consume anywhere from 500,000 to 750,000 bpd of diesel for home heating during the month.
In Japan, estimated sales of kerosene reached 560,000 bpd in the week to Jan. 16, up around 200,000 bpd from December and well above mid-summer rates below 100,000 bpd, according to Reuters calculations based on Petroleum Association of Japan data.
In South Korea, overall temperatures in January are seen in line with last year, according to the Korea Meteorological Association. A year ago January kerosene use reached a December peak of around 80,000 bpd, up from barely 15,000 bpd in the summer months, data show.
Last year, German heating fuel use peaked in January at some 462,000 bpd, according to German data, nearly 300,000 bpd above the low points in May.
The winter swing in fuel use is not what it used to be. US residential use of distillate fuel has halved over the past three decades as households switched to natural gas. It rose in 2014 to the highest in five years due to the extreme cold, reaching an average 250,000 bpd, EIA data show.
In Germany, consumption has dropped more than a third in 10 years, reversing a trend that emerged after unification, when oil boilers made inroads in the former East Germany.
Back on a Brooklyn street lined with tank cleaning facilities, activity is a more brisk than in December, but still far from booming. “It’s nothing crazy, nothing more than normal,” said Tony Mazzone, a driver with CAM Fuel Inc. -Reuters