LONDON: Low heating fuel stocks in all major consuming regions could reverse oil’s slide from record highs, as refiners struggle to build a supply cushion for peak winter demand.

Oil prices have tumbled 15 per cent as crude supplies swell, but the bull run may not be over yet as historically low heating fuel inventories from New Jersey to Japan leave markets exposed to sustained cold weather.

“It is clear the winter will start with very low stocks which refiners will have to scramble to make up,” analysts PFC Energy said. “The market may well continue to underestimate the size of the problem.”

Low investment in new facilities has left refiners running flat out to meet rising world fuel consumption, and unable to build adequate stocks for seasonal demand peaks such as the northern winter.

An array of stricter environmental rules for diesel, a big driver of the rise in global demand and part of the same distillate production pool as heating oil, also makes it more difficult for refiners to ship fuels between continents.

The International Energy Agency’s (IEA) latest figures show distillate stocks in industrialised nations around 11 million barrels or 2 per cent below the 5-year average.

As US and European refiners emerge from maintenance in coming weeks they will bring new units onstream that should increase their supply of heating fuel from lower-quality crudes, said the IEA’s stocks analyst Harry Tchilinguirian.

Much will depend on the weather in the key heating oil consuming region of the US northeast. Temperatures are currently below average, and private forecaster EarthSat says the US winter could be 4.5 per cent colder than last year.

US heating oil inventories are already over 10 million barrels or 21 per cent below this time last year, after unexpectedly falling last week, government data showed. This came despite a sharp 3.2 per cent rise in refinery capacity use.

US demand for distillate fuels, which comprise heating oil, diesel and jet fuel, stayed strong in the past four weeks at 7.3 per cent above the same period last year.

Japan’s stocks of kerosene, used for heating, rose last week on higher refinery output though remained 10 per cent below last year’s level. Heating oil stocks in Germany, Europe’s largest oil consumer, are the lowest in November for at least 20 years.

Market bulls say that after this month’s sell-off speculators are currently net short of heating oil futures, and so could provide an impetus for another price spike.

“We would continue to see this as a very dangerous strategy to take so far from the peak of demand,” said Barclays Capital. Fund investors, avoiding poorly performing equity markets, helped drive oil’s rally this year.

A demand-led surge in heating oil futures in New York could fail to attract sizeable imports from Europe, as in previous years, since European supplies are also thinly stretched, further adding to any US rally.

Heating oil consumer inventories in Germany failed to build last month, staying at 60 per cent of capacity at the start of November, 15.6 million barrels down on last year. Stocks usually rise in November, with a 20-year average of 69 per cent capacity.

Industry monitors Euroilstock said European-wide distillate stocks fell 6.15 million barrels or 1.7 per cent last month despite higher refinery use, though they remain 1.9 per cent above last year.

Refiners now have more plentiful access to crude, as stocks have risen in recent months on high production from the Opec cartel. The US government says refiners should have enough crude to boost heating oil inventories ahead of winter.

But many analysts say demand will still outstrip capacity.

“A repeat of the long list of ‘shocks’ – Iraq, China, Hurricane Ivan, YUKOS – that traumatised the markets in 2004 might not seem nearly so important if spare capacity is perceived to be rising along with inventories,” said Adam Sieminski of Deutsche Bank.

“This growth can not happen overnight, however, and so the oil markets are likely to remain vulnerable to upside excursions for several quarters,” he said.

Demand from China, which overtook Japan as the world’s second largest oil consumer this year, is expected to slow in 2005 but will keep sucking up spare refining capacity in Asia.

“The pause in Chinese buying is a bear trap,” said Barclays Capital in an energy report. “We believe that Chinese operational inventories are being run down, and China will soon have to return to the market in some force.”