Oil demand lift from icy weather not a sure thing

Bob Tippee

Shouldn’t a cold Northern Hemisphere winter give oil demand, struggling to recover from recessionary doldrums, a huge lift? Maybe not.

Yes, heating oil users have been burning more of the fuel than they would have in warmer weather. But the effect on total demand is muted.

The International Energy Agency’s Oil Market Report for February points out that heating oil consumption patterns are changing in the developed nations of the Organization for Economic Cooperation and Development (OECD).

“The share of oil for heating and power generation in the OECD has been shrinking uninterruptedly over the past decade,” IEA explains. “Other energy sources, notably natural gas, renewables, and nuclear power, are becoming the fuels of choice for both purposes, displacing both distillate and residual fuel oil.”

In the cold first quarter of last year, heating oil represented 9% of total OECD oil demand, IEA points out. In the early 1990s, the share was 15%. In the past 15 years, OECD first-quarter heating oil demand has fallen by a third.

“Even if first-quarter 2010 proves to be as cold as first-quarter 2009,” IEA says, “the heating oil surge—and the concomitant fall in distillate stocks—predicted by many observers is unlikely to materialize.”

A distillate drawdown would lower oil in inventory from unusually high levels, easing a downward force on oil prices.

IEA projects average OECD heating oil demand of 3.7 million b/d in the first quarter this year, 13% below the first quarter of 2009.

In its assessment of the trend underlying this outlook, IEA is not alone.

The Centre for Global Energy Studies, London, in a Feb. 3 report notes difficulties in isolating demand boosted by icy December and February from effects of the global recession. It sees early indications of a weather-related demand bump.

Overall, however, oil demand is becoming “less seasonal by the year,” CGES says.

“Indeed, these days the hurricane season in the western Atlantic can have a more pronounced effect on oil prices than a cold winter as a result of storm-induced damage to the extensive oil and gas infrastructure in the US Gulf of Mexico.”

(Online Feb. 12, 2010; author’s e-mail: bobt@ogjonline.com)

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