El Niño's exit good news for heating oil suppliers as it means cold winter

The warmest winter for more than 30 years reduced fuel oil demand drastically in the United States and left the country heavily oversupplied with heating oil. The good news for refiners and heating oil suppliers, however, is that next winter will almost certainly be colder, boosting demand in the months ahead.

Heating demand across the continental U.S. was 16 percent below average from December to February, according to the National Oceanic and Atmospheric Administration (NOAA).

Temperatures were so high on average for much of that period that some analysts dubbed it "the year with no winter." The aberrate conditions are unlikely to be repeated.

Heating accounts for only a small share of distillate fuel oil consumption in the United States. But the mild winter, coupled with sluggish freight movements, cut consumption by almost 37 million barrels from December through February compared with the previous winter.

Distillate consumption was down more than 9 percent, or about 400,000 barrels per day, from the previous year, U.S. Energy Information Administration data show. By the end of February, U.S. stockpiles of distillate fuel oil were almost 40 million barrels higher than the year earlier.

Next winter is likely to be significantly colder, helping to boost heating demands and run down stockpiles. The El Niño weather pattern, commonly blamed for the unusually mild winter, is rapidly disappearing.

By next winter, it is likely to have been replaced by its cooler twin, La Niña, according to NOAA's Climate Prediction Center. NOAA puts the probability of La Niña conditions between December 2016 and February 2017 at almost 70 percent.

There is no simple relationship between El Niño, temperatures and heating oil consumption. However, assuming that the coming winter brings temperatures closer to average, distillate consumption could rise by about 18 million barrels, or 200,000 per day, compared with winter 2015-16.

If the U.S. and global economies also avoid recession, which seems likely, renewed growth in freight demand could push consumption up even more.

A normal winter across the U.S. 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.