Heating oil adds pain to winter fuel bills

LONDON (Reuters) - Europeans face higher energy bills this winter as low heating oil stockpiles clash with cold weather forecasts and a tight power and gas sector.

The continent's residential heating is mainly from heating oil, gas or electricity. Tight markets in all three, combined with expectations of a cold winter, are likely to sharply increase heating bills.

The International Energy Agency said last week that European middle distillate stocks, including heating oil, which usually build by 8.9 million barrels on average, fell by 0.6 million barrels in August.

Middle distillate fuel inventory in Europe's Amsterdam-Rotterdam-Antwerp oil hub, fell last week to 18-month lows of 2,235 tonnes, the lowest level since April last year.

Wholesale heating oil prices on the European barge market, which feeds into the German market, the continent's largest, rose on Thursday to the highest since April 2008 of around $12.5 a tonne over ICE gasoil futures.

"Consumer costs of heating oil in Europe after tax have never been this high in the winter," said Petromatrix's Olivier Jakob. "The other peaks were in the summer of 2008, but that was not the season for heating oil".

Traders have little financial incentive to stockpile while prompt oil, which could be stored, is more expensive than buying material for future dates -- a backwardation price structure on the price chart curve.

"The starting point is relatively low inventories, so will we accumulate enough in order to handle a colder-than-expected winter?" said BNP Paribas' head of commodity markets strategy Harry Tchilinguirian.

Forecasters are expecting the early onset of winter to be cold in Western Europe.

"We expect another winter of unusual cold and occasionally disruptive snow from the British Isles and France across Germany and southern Scandinavia to the Baltic states," said Richard James, senior meteorologist at WCS.

"The highest likelihood of unusual cold appears to be in early to mid-winter (late November to January), with moderating conditions possible by February. Wet conditions will prevail in southern and southeastern Europe, but it will be generally dry in the north."

Standard Bank's oil analyst James Zhang said even higher heating oil prices are a strong possibility, further reducing the incentive for end-users to stockpile.

"Middle distillate inventories in general are higher than in 2007, so we are not talking about an extreme blow. But the fact is that the counterseasonal decline over the last two months points to the strong possibility it's going to be declining further," he said.

TIGHT POWER & GAS MARKETS

Europe's gas markets also look tight as strong Asian demand for liquefied natural gas clashes with supply cuts caused by the Libyan crisis and maintenance work Qatar, the world's biggest LNG exporter.

With the exception of the Nordic power markets, which look to have stable hydro reserves for this winter, Europe's spot electricity prices are also vulnerable to spikes this winter as high seasonal demand combines with short supply after Germany axed a big chunk of its nuclear capacity.

Some form of relief could come for countries that rely heavily on coal-fired power generation -- mainly German and Britain.

Because international coal markets were less affected than other energy markets by the political turmoil in North Africa and the Middle East and by the Fukushima incident, coal prices have remained low compared with power or gas.

Additionally, prices for carbon emission certificates that utilities need when burning fossil fuels, have dropped significantly since summer.

And because coal-fired electricity generation is more polluting than gas, a drop in CO2 prices benefits coal-power production.

"This will come as a relief to countries with high coal-power generation and some electrical heating, something you mostly see in parts of continental Europe, but markets like the UK where gas dominates generation and heating will not benefit from this price structure," a utility trader said.

But the main hope of price easing lies in Libya.

Italian oil major Eni (ENI.MI) and Libya's National Oil Corporation on Thursday launched tests of the Greenstream pipeline as they aim to fully restart the flow of Libyan gas to Italy, boosting Italy's gas supplies ahead of winter.

A recent sharp rise in UK consumer energy bills have seen the regulator Ofgem asking British energy companies to simplify their billing to make it easier to compare prices and overhaul a system Ofgem believes is stifling competition.

(additional reporting by Gwladys Fouche in Oslo, editing by William Hardy)