Energy Markets Rebound as Winter Weather Boosts Fuel Demand
Oil prices surged over 1% on Thursday due to the impact of cold weather on fuel demand in parts of the United States and Europe. The increase is attributed to higher winter fuel consumption driven by biting weather conditions across the Northern Hemisphere, where oil demand has picked up significantly particularly for heating fuels.
Brent crude futures saw a significant gain of $1.29 per barrel, reaching $77.14 by 1:10 p.m. EST, while U.S. West Texas Intermediate (WTI) crude futures also rose by $1.15 per barrel to $74.16. This shift marks an intriguing contrast from Wednesday’s market trend where both benchmarks plummeted more than 1%.
Winter weather-related factors are largely responsible for this sudden reversal in the market dynamics, according to energy experts and traders who point out that colder conditions lead to elevated fuel consumption which directly impacts oil prices. The United States National Weather Service has issued winter storm warnings across large sections of Arkansas, Tennessee, and parts of east Texas up until northern Kentucky.
"This winter demand story we’re seeing here in the U.S. is definitely kicking in," highlights John Kilduff, partner at Again Capital, underscoring the seasonal influence on fuel consumption. "We’ve seen increased interest from refiners as they adapt production levels to meet higher demand, and this trend indicates that refiners are taking proactive measures by increasing capacity."
TACenergy’s trading desk observed that though the severe weather primarily affects areas around the U.S. Gulf Coast, power outages could be more of a concern than initial expectations. Weather patterns can significantly influence regional energy consumption, with heavy rain and wind posing additional risks for infrastructure resilience during these periods.
Again Capital’s Kilduff elaborated on refinery operations during this period saying, "Yesterday we witnessed high levels of refinery production, with refiners running at capacity to meet burgeoning demand for all categories of fuel. This increased activity underpins current oil price trends." Data from LSEG indicates that ultra-low sulfur diesel (ULSD) futures have reached their highest point since October 8 this year, trading around $2.39 per gallon, further underscoring heightened demand for heating fuels.
Energy Information Administration data on 2023 January reveals notable gains in refined product runs and utilization rates across the country with respective increases of 45,000 barrels per day (bpd) & 0.6 percentage points to 93.3%. The crude oil net inputs from refiners along the U.S. Gulf Coast have reached their highest levels since December 2018.
Market analysts at JPMorgan predict that global oil demand for January is expected to rise 1.4 million barrels per day (bpd) compared to last year to reach an estimated 101.4 million bpd, mainly driven by the increased use of heating fuels across the Northern Hemisphere along with a notable increase in travel activities during China’s Lunar New Year holidays.
Additionally, market structure data from Brent futures indicates growing concern among traders that supply is tightening while demand rises, backed up by the largest premium of prompt-month Brent over the six months’ contract since August 2022.