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Commodities

Record U.S. warmth brings out natural gas and heating oil bears: Kemp

LONDON (Reuters) - El Nino has helped produce an unusually mild autumn and start to winter across the United States, sharply cutting the demand for heating and worsening the glut in supplies of natural gas and heating oil.

People walk through a tunnel into Belvedere Terrace on a warm October afternoon as the first hints of fall colours appear on the trees in New York's Central Park in Manhattan, October 8, 2015. REUTERS/Mike Segar

Warm weather and surging energy production have pushed heating oil prices down to the lowest level since 2004 and natural gas prices to the lowest since 1999.

El Nino’s lingering effects and continued oversupply could keep prices for both fuels under pressure for some time, with the weather impacts persisting well into 2016.

According to the U.S. National Oceanic and Atmospheric Administration (NOAA), heating demand has been 23 percent lower than normal so far during the current heating season, which began in July, (tmsnrt.rs/1MrbfWF).

Between September and November, every state in the continental United States experienced above average temperatures.

And temperatures were "much warmer" than normal in 41 states across the Rockies, Great Plains, Midwest, Northeast and Southeast. In many cases, average temperatures have been close to the highest recorded since 1895 (tmsnrt.rs/1MrbtwY).

The run of exceptionally mild weather has continued into the start of winter. Last week, heating demand was 30 percent below normal for the time of year (tmsnrt.rs/1Mrbnpg).

WOPSENING OVERSUPPLY

Unseasonal warmth has sharply cut the amount of natural gas, distillate fuel oil and electricity required to heat homes, offices, schools and factories.

Consumption of distillate is down from 4 million barrels per day in October to 3.6 million barrels per day in late November and early December, according to the U.S. Energy Information Administration.

Most distillate is consumed by trucks, trains and in construction vehicles as transport diesel rather than as heating oil and distillate consumption typically declines slightly towards the end of the year.

Nevertheless, the drop in consumption has been especially pronounced this November and December, sending consumption to the lowest level for the time of year in more than a decade (tmsnrt.rs/1MrbEIN).

Relative warmth has also cut gas consumption in buildings that burn gas directly in their heating systems, as well as in the power plants that supply homes, offices and other buildings that have electric heaters.

Poor demand for both fuels has combined with surging supply to leave the country carrying unusually high stockpiles.

Refineries are running at record rates to meet strong demand for gasoline, leaving the market with a large oversupply of unwanted distillates.

And gas production is still increasing as drilling firms sink a new generation of super wells into the highly productive Marcellus and Utica formations beneath the northeast United States.

Distillate stocks hit 152 million barrels in the week ending Dec 11, which was 21 million barrels higher than the 10-year average, and 30 million barrels higher than at the same point in 2014 (tmsnrt.rs/1MrbMI8).

The amount of gas in working storage is almost 18 percent higher than normal, at a seasonal record, and falling more slowly than usual at this time of year (reut.rs/1MrbP6K).

EFFECTS SET TO LINGER

Every El Nino is different, and the impact on weather is complicated and still not fully understood, according to NOAA.

But the warmer than normal weather could continue for some time. The current El Nino is one of the three strongest since 1950 (the others in the top three occurred in 1997/98 and 1982/83) and will likely last well into 2016.

The biggest impact on the United States is probably still to come (“December El Nino update: phenomenal cosmic powers” NOAA, Dec. 10).

“While the warmer-than-average ocean waters are likely reaching their peak about now, they will remain a huge source of warmth for the next several months to drive the main impacts on temperature and rain/snow over North America, which typically follow the peak. The main impacts season is December-March,” according to NOAA.

“Most models indicate that a strong El Nino will continue through the northern hemisphere winter 2015/16” followed by a return to more normal conditions by late spring or early summer (“El Nino Diagnostic Discussion” NOAA, Dec. 10).

(John Kemp is a Reuters market analyst. The views expressed are his own)

Editing by David Evans

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