IEA says winter cold weather is not boosting oil demand

In spite of a winter that has been colder than normal, heating oil demand in industrialised countries this quarter is down thirteen percent from last year, says the IEA.

Conventional wisdom and common sense would suggest that cold weather increases heating oil demand, which lifts demand for crude, and higher demand leads to higher oil prices. Many banks and financial institutions agree, and heating oil consumers have seen day-to-day heating oil prices rise sharply on occasion in response to a cold snap. When cold weather hits, investors are willing to pay more for crude and heating oil futures because they expect oil demand will surge during freezing weather. However, the IEA says that’s simply not the case.

In the US, heating oil inventories actually increased earlier in February, which is surprising for a fuel that often sees steady demand and falling inventories throughout the winter.

How can that be? Conservation and energy-efficiency initiatives have certainly played a role, but the IEA says “the reason is largely structural.” That is, industrialised countries have been increasingly reliant on fuels besides heating oil for home heating. Analysts expecting low temperatures to swell demand and cut into heating oil inventories will be disappointed, according to the agency.

At the individual level, of course, cold weather does increase demand for heating oil; when the temperature falls, you burn more oil to keep your house warm. But with fewer homes and businesses using heating oil, cold weather doesn’t have the same impact on global oil demand that it once did. If, as the IEA says, this heating season’s freezing temperatures haven’t been enough to raise heating oil demand, how could they have any effect on overall oil demand?

If oil traders are convinced by the IEA’s data, then the market price of heating oil could be less susceptible to seasonal shifts in the future, and markets could avoid the price spikes and fluctuations that occur just when consumers need heating oil the most.

Tags:  IEA, oil, oil demand, winter