A. Deshpande, Oil Markets Analyst at Natixis, on China's oil demand and ban on U.S. oil export

We are seeing a rally in heating oil prices due to the adverse weather conditions and expectations of more cold weather ahead. Heating oil is up almost 10 cents/ga in the last week.

Heating oil inventories have dropped significantly in the PADD1 region, after rising from a historic low in December. A large portion of the East Coast still uses heating oil as the colder weather in this region has boosted demand for home heating.

Cold weather conditions in the U.S. have caused a significant surge in natural gas prices, with many City-Gate prices (especially on the East Coast) spiking sharply where supply infrastructure has proved insufficient relative to demand. In some cases, this has made heating oil more economical than natural gas, boosting demand for heating oil from power companies. 

With U.S. refineries expected to reduce their processing rates seasonally around this time of the year, this also could increase pressure for higher heating oil prices. 

Oil prices in the U.S. are up $4/barrel; however, it is less related to oil demand and more to do with the start-up of the Gulf Coast pipeline, which carries oil from Cushing to PADD3, where the bulk of U.S. refineries are based.

Based completely on free and fair markets, it makes sense to lift the ban on U.S. oil exports. 

The current ban on U.S. oil exports is helping a handful of oil consumers, in particular, U.S. refineries on the Gulf Coast and East Coast, also some petrochemical plants. Consumers of oil products do not share in the full advantage of lower U.S. oil prices, since they are in part competing with overseas markets, which can be supplied by U.S. exports.

Allowing U.S. companies to export oil will not only help U.S. oil producers. If U.S. oil was more freely available in the global market, this would help to depress international benchmark prices as well as the prices of local U.S. blends. Therefore, the price of global oil products would fall as well, helping to bring down the price of U.S. oil products.

Additional benefits would include reducing the U.S. trade deficit (which is already falling due to lower U.S. crude imports) and tax receipts would also be likely to increase.

Chinese demand for oil products was not as strong in 2013 as we had anticipated, increasing by just 2.2% year over year, after a particularly weak Q4. With China's growth likely to be impacted by policies on deregulation and environmental protection as well as measures to address overcapacity, we expect only modest growth this year in Chinese demand for oil products. Nevertheless, this could be supplemented by additions to China's SPR stocks. One of the facilities that are expected to come online is Tianjin or some other facilities with 60mn barrel capacity. Besides, growth in global economy in general and Europe in particular will help boost export based demand for China and oil demand will grow even if rates fall lower than those seen pre-2013.

Oil prices in 2013 were driven mainly by the supply side of the equation that was impacted by strong growth in non-OPEC production, led by the U.S. We expect that supply will continue to outpace demand in 2014 and demand is expected to improve as the global economy recovers. Since the call on OPEC is expected to fall only marginally by around 200,000b/d. Brent prices are expected to remain around the top end of OPEC's $100-110/barrel target price range as political unrest across the Middle East and North Africa continues to restrict expansion in crude output in countries such as Iraq and Libya. Brent-WTI spread should narrow to around $5-6/barrel based on transportation costs; however, this may be delayed if the growth in U.S. oil output still outpaces the growth in pipeline and crude by rail take-away capacity.  U.S. oil prices will also depend on the extent to which exporting countries reduce their supplies to the USGC.

Some key risks to oil prices: