Cold blast may tighten Atlantic heating oil supply crunch

LONDON/NEW YORK (Reuters) - A blast of Arctic air sweeping through Europe and snow storms in the United States this weekend are likely to push up already lofty diesel and heating oil prices, further burdening economies struggling to bounce back from recession.

Surges in demand combined with very low stocks on both sides of the Atlantic will exacerbate supply shortages that distributors are seeing in Europe and boost already lofty refining margins.

"Because this winter is forecast to be colder (than last year) household demand for heating oil for this winter is projected by the US Dept of Energy to be up roughly 16 to 18 percent, depending on the severity, concentration and duration of the cold temperatures," said Alan Lammey, energy analyst at WeatherBell Analytics.

Last year October saw 11.5 million barrels of heating oil consumed in the United States, according to the Energy Information Administration.

This was the lowest October reading on record and there has been a steadily falling picture since 2005, but this year is likely to see this trend end, unless there is another very mild winter.

That might not happen as forecasters predict it will be cooler this year than last in Europe as well as the United States, and low stockpiles of gasoil mean even relatively short cold snaps may lead to sharp spikes in already high prices.

This could further pressure economies that are struggling to emerge from a lengthy downturn as it will limit consumers' disposable incomes.

There will be near, or slightly below normal temperatures in both northern and central Europe, making it substantially colder than last year's temperate winter, said Georg Muller, senior meteorologist at Reuters Point Carbon.

And even a few days of very cold weather, as is expected this weekend in Europe, could lead to consumers with dwindling stocks stampeding to fill up their tanks.

Up until now, consumers have been reluctant to build up stocks, as they have hoped for falling prices.

"With high prices, there's a tendency to try your luck and not to rush into building stocks," said Olivier Jakob, analyst at Petromatrix in Zug, Switzerland.

SCARCE SUPPLY

Heading into the peak winter demand period, stocks of heating oil, diesel and jet fuel on the East Coast of the United States are now more than 23 million barrels below the 5-year average for this time of year at just under 40 million barrels.

Rebuilding these low stocks will be slow because exports to South America will remain robust due to strong demand from industry, said Harry Tchilinguirian, analyst at BNP Paribas.

Gasoil stocks independently held in the Amsterdam-Rotterdam-Antwerp hub fell below 2 million tonnes for the first time since January, data from independent oil analyst Pieter Kulsen showed, as higher prices in the short versus long term discouraged storage.

German heating oil stocks were at 58 percent of capacity at the start of October, up slightly from the previous month, but 1 percentage point below the level at the same time last year, and well off the 62 percent average seen between 2005 and 2011.

Germans are the largest consumers of heating oil in the region, with a large proportion of households heating their homes with gasoil tanks stored at their homes.

New state environmental regulations in New York which require heating oil users in New York to fire their furnaces with the same diesel used by trucks and other motor vehicles could exacerbate the situation.

One market participant who deals in barges of fuel said this would likely lead to sharp spikes, perhaps as soon as this weekend, which is expected to be significantly colder in Europe.

"The market will jump about every time it's even a little cold and demand surges, because we're severely backwardated and there are no stocks," one market participant in the mid distillates market said.

Backwardation refers to a market structure where prices are higher for more prompt delivery, giving little incentive to build stocks.

Refiners are likely to be the main beneficiary of the cooler temperatures.

The refinery margins for both diesel and heating oil in Europe are much higher than they were last month, with one barrel gasoil yielding around $10 per barrel, compared to a loss of around $3 in early September.

(Reporting by Adam Kerlin in New York and Simon Falush in London, additional reporting by Jessica Jaganathan in Singapore; editing by Keiron Henderson)

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