Why Warmer Weather Is Not "Cooling Off" Oil Prices

It's nearly 75 degrees in New York today, the sun is shining and it certainly feels like spring is here.

Yet, heating oil prices at the NYMEX continue to set new records, climbing past $3.32 a gallon this morning, and settling at $3.19.

European gas oil hit a new record today as well on the expiration on the April ICE contract. And due to unexpectedly strong demand, particularly from China. We're talking at the demand picture for diesel in particular. That is truly on fire around the world.

After power outages in South Africa, Chile and China, many companies have been forced to run diesel generators to offset interruptions in electricity supply. A severe winter in Southeast Asia also served to increase heating oil demand.

Also as energy analyst Andy Lipow points out, look at the European Union and China--both of those regions use more diesel than gasoline. Our diesel exports are heavily making up for overseas demand. Add to that the refinery snags which are occurring across the country and other parts of the world and what you'll find is record diesel prices and record heating oil prices as well.

Goldman Sachs says the late season surge in distillate demand is driving a "transient" price spike. In a research report released late this afternoon, Jeff Currie and his team report though "strong power-generation demand and a late winter cold snap have pushed gasoil prices and the complex higher...we believe weak-near term transportation fundamentals are now likely to dominate."

So what impact will all this have on crude prices? Heating oil's 20 percent surge so far this year has certainly helped inspire the 15 precent rally in crude during this time. But Goldman still sees the downside risk in crude oil prices limited to the high $90s.

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