Oil, by market reputation, is a seasonal commodity. Investors and consumers long ago got used to the idea that demand spikes in winter, as Northern Hemisphere heating needs jacked up consumption – running down oil inventories and pushing up prices.
Well, get un-used to the idea. The International Energy Agency says that's a thing of the past; consumers have moved on, and they won't be burning oil to heat up prices this winter.
In a new report, the IEA (the energy agency of the Organization for Economic Co-operation and Development) points out that winter seasonal demand in recent years has shrunk, from a significant market event to barely a blip on oil's radar screen.
The IEA's research shows that from 2000 to 2008, prior to the Great Recession, heating needs routinely increased world oil demand by 1 per cent during the Northern Hemisphere's winter months. That might not sound like a lot, but it represents about 900,000 barrels a day of extra consumption – enough to squeeze supply chains and push up prices. Seasonal price surges in the range of $10 (U.S.) a barrel have been pretty typical for West Texas Intermediate crude, the North American benchmark.
But while the seasonal price spikes have persisted since the Great Recession, seasonal consumption has not. The IEA notes that global oil demand since 2008 has actually declined by an average of 0.2 per cent during the Northern Hemisphere's winter, compared with demand levels in the rest of the year. In Canada, winter demand swung from an additional 1.3 per cent in 2000-2008, to a decline of 0.4 per cent since then.
The IEA cautions that post-recession years tend to reflect a long period of economic slowdown. Nevertheless, remember that this is not a comparison with pre-recession winter demand, but with post-recession demand at all other times of the year. Comparing post-recession to post-recession, the winter demand "premium" (as the IEA calls it) has evaporated.
Why? In short, price. Oil has remained north of $75 a barrel since the middle of 2009, and near $100 a barrel for most of the past three years. With historically high oil prices quite likely here to stay, consumers have turned away from oil heating en masse. Much cheaper natural gas, together with electricity (from, increasingly, natural-gas-fired power plants) have substantially displaced oil (and oil-powered generation) as the heating source of choice.
The IEA notes that only 6 per cent of U.S. homes used heating oil in 2009, down from 11 per cent in 1991 – a decline of nearly half. In addition, the IEA says, high energy prices have made households much more energy-efficient (think insulation and high-efficiency furnaces), reducing winter demand. In 1993, 58 per cent of energy consumption in U.S. homes was for heating and cooling; by 2009, that had dropped to 48 per cent. Given the price trends since 2009, it's entirely likely that these trends have continued.
With Europe's economy on the mend, the IEA projects that OECD oil demand could see a modest seasonal rise of 0.4 per cent over the winter – still far below the OECD's pre-recession winter demand premium of 1.6 per cent. Obviously, the weather will be a big factor; colder-than-usual winters demand more heating. But barring a freakishly cold winter, if oil prices do creep higher, it could be more out of old market habit than fundamental reality.