Colder winter could save US distillate fuel market

By John Kemp

LONDON, May 4 (Reuters) -- The warmest winter for more than 30 years reduced fuel oil demand drastically in the US in 2015/16 and left the country heavily oversupplied with heating oil.

The good news for refiners and heating oil suppliers, however, is that winter 2016/17 will almost certainly be colder, boosting demand in the months ahead.

Heating demand across the continental United States was 16% below average between December and February, according to the National Oceanic and Atmospheric Administration.

Demand for heating fell more than 21% year on year compared with the winter of 2014/15, which was significantly colder than normal.

Heating accounts for only a small proportion of distillate fuel oil consumption in the US. But the mild winter, coupled with sluggish freight movements, cut consumption by almost 37 MMbbl between December and February compared with the previous winter.

Distillate consumption was down by about 400,000 bpd, more than 9%, from the previous year, US Energy Information Administration data shows.

By the end of February, US stockpiles of distillate fuel oil stood almost 40 MMbbl higher than a year earlier.

Temperatures were so high on average for much of the period between December and February that some analysts have dubbed it "the year with no winter".

But the past winter was so unusual that it is unlikely to be repeated. Much more likely is that the 2016/17 winter will be significantly colder, which should help to boost heating demand and run down stockpiles.

The El Nino weather pattern, commonly blamed for the unusually mild winter across the US, is rapidly disappearing.

Warmer than normal sea surface temperatures in the central Pacific, which drive the atmospheric circulation associated with El Nino, are cooling rapidly.

El Nino conditions peaked in November and the phenomenon is likely to disappear completely within the next few weeks.

By winter 2016/17 El Nino is likely to have been replaced by its cooler twin, La Nina, according to the National Oceanic and Atmospheric Administration's (NOAA) Climate Prediction Center.

The NOAA puts the probability of La Nina conditions between December 2016 and February 2017 at almost 70%.

There is no simple relationship between El Nino, temperatures across the US and heating oil consumption because too many other circulatory systems affect winter weather across North America.

But strong El Nino episodes have tended to be associated with warmer than normal winters, lower than normal heating oil consumption and a rise in heating oil stockpiles.

The past winter featured one of the strongest El Nino episodes on record, which is unlikely to be repeated at such strength in 2016/17.

Assuming that the coming winter brings temperatures closer to average, distillate consumption could rise by about 18 MMbbl, or 200,000 bpd, compared with winter 2015/16.

If the US and global economies also avoid recession, which seems likely, renewed growth in freight demand could push consumption up by an even larger amount.

A normal winter across the US has therefore become central to market expectations for a rebalancing of oil production and consumption and relatively rapid normalization of stockpiles in the second half of 2016 and early 2017.