* First wave of winter fuel buying is over, demand subdued
* Fuel substitution for gas reduces oil demand elasticity
* Cold winter legacy could be tighter supplies in 2011
By Emma Farge
LONDON, Dec 15 (Reuters) - Comfortable stocks and fuel substitution are likely to prevent price spikes in the European oil products market this winter but a lasting freeze could still be a game-changer for global oil supply fundamentals in 2011.
Temperatures in early December have been unusually low across the northern hemisphere, with some forecasters predicting that the cold spell will endure, boosting demand for heating fuels in the two major demand hubs: Europe and the United States.
But while Brent crude prices have rallied over $90 a barrel this month as an anticipated buying spree for heating fuels has lifted sentiment, actual demand and refined product prices in Europe have lagged.
Gas oil stocks used for heating in the storage hub of Amsterdam-Rotterdam-Antwerp have risen for the past seven weeks to a 15-month high near 3 million tonnes.
"Prices went up to $90 a barrel on the expectation of heating oil demand but product prices haven't really reacted. They (consumers) don't have to go out and buy yet since stocks are comfortable," said Roy Jordan, analyst at Facts Global Energy.
A German buying spurt in early autumn has left stocks above 60 percent of capacity and high enough to cope with any extra demand since the December cold spell began, traders said.
"The Germans don't care about the cold -- they bought back in September and don't need to buy again until February or March," said one London-based distillates trader.
Rising refinery runs in both Europe and the United States after planned maintenance to between 85-90 percent of capacity is also helping to keep tanks topped up.
Gas oil refining margins on the IntercontinentalExchange (ICE) have traded near $11 a barrel for most of the past month which, although still above last year due largely to the gloal economic recovery, are still below October highs near $14.
In another sign of supply comfort, the front month ICE gas oil contract has moved to a deep discount to more distant futures contracts in a structure known as contango.
U.S. heating oil margins have so far this winter been higher than in Europe at around $15 a barrel after hefty stock draws.
DEMAND EROSION
Another factor which could cap price rallies in the products market is a high degree of fuel substition from oil to cheaper, cleaner natural gas over the past 10 years, analysts said.
Oil demand elasticity in cold weather has shrunk over the past ten years and will theoretically rise by a maximum of just 140,000 barrels per day (bpd) in the event of a lasting freeze compared with 350,000 bpd in previous years, the International Energy Agency said in its latest monthly report.
Utilities have switched on normally idle oil power plants during December's cold spell to feed extra power onto grids, but the price impact is limited since oil plants now only represent a tiny portion of European capacity.
Margins for fuel oil, used in power generation, have hovered near two-year lows of minus $16 a barrel in December.
STOCK DRAIN
Still, a consistently cold spell could result in a significant draw in the European stock overhang, supporting the entire complex and potentially boosting both crude oil and product prices next year.
Germany restocking could again kick in at the start of spring, traders said.
"The cold weather will definitely boost demand, it just won't do it in a logical way. If we have the cold in December and January, they (German consumers) may just run down stocks and buy through February, March, April, May," said a products trader with a European bank.
The legacy of last winter -- one of the longest and coldest on record in Europe -- was a sharp drop in distillates held in floating storage from an all-time peak of 100 million barrels.
Distillates held in floating storage have fallen dramatically over the past year, with about 20 million barrels left globally.
"If stockpiles start from a lower level (next year), then there is less of a cushion if demand picks up more than expected or if there is some supply-related disruption, making prices more volatile and with risks to the upside," said Carsten Fritsch, analyst at Commerzbank.
Record Chinese demand for diesel at 9.3 million bpd in November -- could drag more flows from Europe and erode stocks further in 2011, he added.
(Additional reporting by Henning Gloystein and Jeffrey Kerr in New York; editing by William Hardy)