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Peter Taberner

Peter Taberner

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Could An Intense Winter Fuel The Oil Price Rally?

winter oil

We are now approaching a time of year, where people across many parts of the world are preparing for the winter season.

Oil consumers and providers will be watching weather patterns, as they could have a bearing on demand and supply in the market, impacting both prices and stock levels.

Last year saw a relatively mild winter, which can be a significant game changer for the fortunes of the heating oil market, although the weather very rarely has any influence on crude oil prices.

This year in the United States, more severe conditions are being predicted by AccuWeather, with above average snowfalls forecast in north eastern areas, where heating oil demand is usually the strongest.

In the New England region, it's thought that there will be fewer days of subzero temperatures, though in general the temperature will average 3 to 5 degrees Fahrenheit lower than last year.

The northern plains should expect temperatures to be down by 6 to 9 degrees, with colder air also expected in the Midwest.

In Western and Eastern Europe, an increasingly stormy climate appears to be the most threatening weather pattern, while Eastern Europe is due to experience calmer conditions. The United Kingdom is set to experience a higher level of storms, while the southern European region will enjoy a milder winter.

In Asia, there will likely be fewer storms in the central region, while torrential rain is expected to bring relief to drought ridden areas in the south. In the Far East, cold weather snaps will likely result in average levels of snowfall in the capital cities of Beijing, Tokyo and Seoul. In north-eastern China more mild conditions are likely during much of the winter.

Only time will tell if the forecasts prove to be exact, and to what extent, if any, the oil market will be affected.

Jim Ritterbursch, the president of Ritterbursch and Associates, opined on the influence of weather on the oil market: “First of all it’s always difficult to fully predict winter conditions at the moment with a great deal of accuracy, there is only a 50 percent chance that this winter will be colder than last year.”

“At the same time, due to the calmer winter that was experienced last year, a sizeable surplus of distillate fuel has been accumulated, and there is 25-million-barrel surplus from last year that will be a nice cushion for the forthcoming winter.”

Ritterbursch believes that the weather is midway down the most powerful factors in what determines oil prices. Related: Oil Prices Slammed As Dollar Suddenly Breaks Out

This year, he points to the current set of market conditions such as the OPEC production deal, Chinese oil demand and the direction of the U.S. dollar as the most influential factors in the oil market.

Oil companies and market forecasters are always looking to see what effect the weather has, effects that go beyond just the impact of winter.

“Seasonal changes are always factored in, with energy users generally hedging from the long side, and inventory holders hedging from the short side. There has not been one year which really stands out when the weather has really changed oil price dynamics.” He reflected.

Andrew Slaughter, Deloitte’s managing director of their Centre of Energy Solutions, said: “Overall, we look very closely and deeply on the temperature situation for the oil and gas markets, in particular over oil in the heating oil market in the north east of the United States.”

Overall seasonality is a more significant issue during the summer time he explained, as the United States has a massive ratio of drivers to its population.

“Heating oil is a very large market in Germany, but in residential areas they have large heating tanks, in the past they have been quite happy to fill their tanks in the summertime in readiness for the winter at summer prices, so the influence of winter temperatures is diminished.” He added.

In most other markets in western Europe, the weather is quite a minor factor, and for crude oil markets in general, it’s hardly a factor at all.

Slaughter continued: “Stock volumes far outweigh the importance of weather conditions for crude oil, comparing the current stock levels to a five-year average would be a far more dominant equation for prices per barrel of oil.”

“In the OECD, and in the West, everything is way over the average stock levels so that keeps prices down, we will see what the influence of the OPEC production cull will be.”

Weather conditions are more likely to alter planning itineraries of refineries, where distillate yields may change, just as the yield would increase in gas markets during the historically high demand time in spring.

Currently, due to the high level of oil inventories , there will likely be low levels of bespoke preparation for this winter, regardless of how cold it gets.

By Peter Taberner for Oilprice.com

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  • Big Earl on October 26 2016 said:
    Big Oil has caused global warming. Winters are not as cold as they used to be. Eventually the earth's climate is doomed.

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