Winter is coming for oil — and not in a positive way

The oil market is deceptively calm. Below the apparent tranquility lies an underappreciated transformation that has slowly reshaped the market over the last 25 years — because the arrival of China and India as big consumers hasn’t just given an enormous boost to demand, it’s also altered the market’s seasonality. And that matters a lot this year.

Until recently, global oil demand peaked every year with the arrival of the Northern Hemisphere’s winter. As temperatures dropped from October onward, heating oil and kerosene consumption spiked from the US to Germany to Japan. Hence, as recently as 2014, the fourth quarter still marked the annual high for crude demand and, typically, prices. Since then, the seasonality has flipped: Now, the third quarter sees higher demand and prices.

The shift means the market is now at its tightest from July to September, rather than October to December. While one-time events can still have an effect — the 2008 global financial crisis, for example, or the Covid-19 pandemic that started in early 2020 — looking over a long enough timescale reveals the change clearly. Because it happened incrementally over a quarter of a century, it often doesn’t get the attention it deserves. But the chart below makes it obvious.

The change has three notable features. First, consumption of winter fuels including heating oil and kerosene is on a structural decline in the industrialized world, replaced by natural gas and electricity. Back in 1990, about 17% of American families heated their homes by burning some kind of refined petroleum product; today, that share has fallen to 9%. The collapse in demand for heating oil in Europe is even more pronounced. At the same time, jet-fuel consumption in those regions, which typically peaks during the summer holidays, is growing fast.

Second, oil demand in fast-growing emerging nations follows different seasonal patterns, partly because of their locations closer to the equator, but also because of the larger role of their all-year-round industrial oil consumption. While industrialized nations mostly abandoned oil-fired power stations after the 1970s energy crisis, some emerging market countries, particularly in the Middle East, burn lots of crude for electricity generation and water desalination. At the peak last summer, Saudi Arabia burned more than 800,000 barrels a day to generate electricity for air conditioning — more than the daily total petroleum demand of Belgium.

And third, climate change is reducing heating consumption by making winters warmer, and boosting holiday travel by making summers hotter.

So this year, global third-quarter oil demand will be 500,000 barrels a day higher than fourth-quarter consumption. In a dataset going back to 1991, the current year will mark only the fifth time when winter demand will be lower than summer consumption.

Despite rising production from the OPEC+ cartel, oil prices have stabilized in recent weeks at just over $65 a barrel — about $10 above the lows seen in early May. If anything, the physical oil market even feels a bit tight. It helps that China has mopped up much of the oil surplus, putting in May and June barrels into its expanding strategic and commercial stockpiles.

But the squeeze will prove temporary; put another way, the market is defying gravity. Because of shifting seasonality, the Northern Hemisphere’s summer is now the tightest period of the year. Winter — and an accompanying decrease in demand — is coming.

For now, the few remaining oil bulls have a few straws of hope to cling to. Global crude refinery intake is rising swiftly this month and looks set to peak in August at a record 85.4 million barrels a day — enough to absorb the series of OPEC output increases. As a result, global oil stocks aren’t increasing meaningfully near where it matters most to the market: the pricing points in northwestern Europe, home of the Brent benchmark, and the central area of the US, home to the West Texas Intermediate yardstick.

But by October, when all of the cartel’s supply hikes will have arrived, along with extra oil from Brazil, Guyana and Canada, refinery throughput will drop to 81.7 million barrels a day, according to the International Energy Agency. The difference – 3.7 million barrels a day – is equal to a couple of mid-sized OPEC nations. Even if China continues stockpiling as much as it has done over the last two months, the surplus would be so large that oil will flow into inventories elsewhere, including near the pricing points on both sides of the Atlantic.

For sure, the market – and I – may be wrong about demand, supply, or both. The expected oil surplus during the now seasonally weaker fourth quarter may be smaller than anticipated. Still, on paper, the glut is so big that even if it turns to be a bit smaller, it would still be enough to put a lot of downward pressure on the market.

As I said, winter is coming for the oil market.