Is winter coming? Balmy December sinks global energy prices

Christmas is a week away, but temperatures more typical of spring than mid-winter are draining global energy markets of any festive spirit.

Natural gas prices are depressed across the U.S. and Europe as the world rounds out the warmest year recorded with unusually warm December weather. Demand in the U.K. for gas this month reached its lowest seasonal level in at least 13 years as households turned their heating off. U.S. gas is heading toward its lowest price in two decades amid record stockpiles, and Asian buyers are turning away gas cargoes in the face of an oversupply.

“The gas demand just isn’t there and the prices have plummeted,” said Zach Allen, president of Pan Eurasian Enterprises, an adviser to the gas industry. “There’s plenty of gas around and there’s no pressure on supply.”

The bad news comes at the end of an already very bad year for prices. Global oil and gas supply surged in 2015 at the same time as Europe increasingly relied on renewable energy sources. A warmer-than-average forecast for the remainder of the month means there probably won’t be enough heating demand to draw down the glut anytime soon.

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On Thursday, front-month natural gas in the U.K., Europe’s most-traded market, traded at its lowest since April 2010. U.K power fell to a 17-month low. U.S. gas is consistently trading below $2 per million British thermal units for the first time since Bill Clinton was president; on Friday it traded at $1.768 per million British thermal units by 8:48 a.m. New York time.

It’s not just gas. Oil-based fuels used in heating aren’t doing any better. The so-called crack spread on gasoil, a measure of how the fuel fares against crude, hasn’t traded this cheaply since 2009.

Natural gas is primarily used in heating and power generation, meaning mild weather damps usage. While the whole year has been warmer than normal, December has been particularly balmy. The average temperature in the U.K. in December through Tuesday was 3.9 degrees Celsius above the 30-year average, compared with 0.4 degree in the first 11 months of the year, according to data from WSI.

In Chicago and Toronto, this winter is so far the warmest in at least a decade, according to data compiled by Bloomberg. So far this December has been the warmest in Europe on record, said Giacomo Masato, a meteorologist at Marex Spectron Group Ltd.

The mild weather “is having a profound effect on demand levels, notably residential heating demand which on some days is at levels you would associate with a cold spring day as opposed to middle of winter,” said Wayne Bryan, a London-based senior analyst at Alfa Energy Ltd. “Barring any unforeseen outage or extreme event there is minimal risk of prices firming over the next month.”

Already the abnormal warmth pushed up stockpiles of natural gas in Europe. They are now at their highest level ever for this time of year, further dragging on prices by worsening the glut.

Gasoil, which accounts for more than a fifth of the EU’s energy consumption, has also piled up amid soft demand. Independently held stockpiles of gasoil and diesel jumped to almost 3.8 million metric tons, according to data from PJK International, a firm that monitors fuel supplies.

Supplies of the so-called distillate have grown so plentiful that the fuel may become a “canary in the coal mine” for the wider oil market, Goldman Sachs Group Inc. said in a report Wednesday. So big is the surplus that oil refineries may have to cut processing rates, thereby curtailing their demand for crude, the bank said. Three tankers had to turn back when en route to Europe from the U.S., vessel tracking data compiled by Bloomberg on Wednesday show.

In the eastern U.S., the world’s largest heating oil market, stockpiles are rising at a time when they typically fall and inventories are 79 percent higher than a year ago. That’s added to the pressure on crude oil prices, trading near a seven- year low.

Yet if 2015 was bad, 2016 may be terrible. The global temperature next year is forecast to be as much as 0.96 degree Celsius above the long-term average, according to the U.K. Met Office annual global temperature forecast. That would make it, again, the warmest year on record.

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