Cold weather saps distillates surplus

Sam Fletcher
OGJ Senior Writer

Colder weather across much of the northern hemisphere in late December and early January accelerated the burn-off of a global distillate fuel surplus.

“A blast of cold weather was not a necessary condition for global distillate inventories to fall back within bounds, but it will certainly help to speed the process along,” said analysts at Barclays Capital Research, a division of Barclays Bank PLC, London. “While average December temperatures hit multiyear lows in some key heating oil-consuming areas in Europe and Asia, the US winter has so far been distinctly cold, but the difference from normal conditions has been less extreme.”

The oil home-heating customer-weighted degree day count for December was 1034, which is 28 degree days colder than normal and 46 degree days more than last year. While US weather in December was colder than many expected, Barclays analysts said, “It has not totally reversed the degree day deficit for the season as a whole, given the relatively late onset of winter.”

Nevertheless, they reported Jan. 6, “In the US alone, the surplus of distillate above its 5-year average has fallen by more than a third from 40.1 million bbl to 26.5 million bbl over the past 6 weeks. The first estimate using whole-year data is that US oil demand fell by 696,000 b/d in 2009. We expect an increase of 150,000 b/d in 2010, with recent macroeconomic data suggesting upside risks to that forecast.”

The Energy Information Administration said commercial US crude inventories increased 1.3 million bbl to 327.3 million bbl in the week ended Jan. 1—above average for the time of year. US gasoline stocks were up 3.7 million bbl to 219.7 million bbl. Distillate fuel inventories decreased 300,000 bbl to 159 million bbl.

“While much of the burning up of excess global distillate inventories has been taking place elsewhere, the US has been playing a more significant part recently. In the latest data, the US surplus of distillates above the 5-year average shrank by 3.4 million bbl to 26.5 million bbl. Six weeks ago, the surplus stood at 40.1 million bbl, and hence, more than a third of that surplus has been burnt off in remarkably quick order. Heating oil inventories have been falling faster than normal over the past month, and the rate of decline has been particularly marked in the key mid-Atlantic states,” said Barclays analysts.

“The total build in US inventories of crude and products (as ever excluding the ‘other oils’ category) has now fallen below 50 million bbl for the first time in over 11 months, with the oil product element of the surplus falling by 4.7 million bbl over the past week to now stand at just 28.3 million bbl, the lowest surplus since last March,” they said.

But if the global distillate surplus is to continue a rapid decline after winter, demand for diesel must grow in this quarter. Barclays Capital expects this quarter to “show some significant sequential improvements in trucking mileages and, hence, in diesel demand.” They said, “In turn, that should allow economics to fairly swiftly complete the winnowing of distillate inventories that weather has accelerated.”

‘Strong’ market
The oil market made a “strong start” in 2010 with the 2009 highs at the front of the price curve topped in early January. Barclays analysts see “plenty of support’ to keep prices “well above $70/bbl” in the first quarter.

Consensus forecasts for the average price for West Texas Intermediate for 2010 are in the range of $75/bbl, with the lowest call at $65/bbl. But Barclays Capital retains its 11-month-old call for $85/bbl “with upside risks.” If oil dropped below $70/bbl for an extended period, it would cause investment shortfalls and project delays that would likely exacerbate “an already tight medium-term picture.”

The Organization of Petroleum Exporting Countries is “capable of dampening forays” above $100/bbl. So the “extreme upside risks” are primarily geopolitical, “at least until supply side tightness takes equilibrium prices significantly higher in coming years,” analysts said. A series of “what have been relatively slow-burning issues” seem likely to “come closer to the boil,” they said.

As for demand, the economic recovery of members of the Organization for Economic Cooperation and Development “will be closely followed, as will the extent to which emerging demand growth continues its recent frenetic pace,” analysts said. “On the supply side, Russia and Brazil are likely, as ever, to be the main wildcards in terms of the variance between output expectations and actual outcomes.”

(Online Jan. 11, 2010; author’s e-mail:

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