Surge in hedging puts downward pressure on the oil futures curve.
By Nick Cunningham, Oilprice.com:
The 20 percent increase in oil prices since September led to a wave of hedging by U.S. shale drillers eager to lock in future production at prices not seen in years. The flip side of that hedging wave is that locking in prices could cut the price rally off at the knees, ensuring that more supply will be forthcoming in the next few quarters.
Shale drillers were hesitant for much of the year, but kicked their hedging programs into high gear after oil prices posted strong gains beginning in September. “The past three months have seen a significant increase in oil hedging, with the volume of new positions more than twice the volume of Q3 hedges that rolled off the books,” Standard Chartered wrote in a recent research note.
The volume of oil hedged for 2018 increased by 29 percent over the past three months. Meanwhile, natural gas prices have barely budged, and the lack of price movement kept gas hedging at a minimum, the bank said.
Interestingly, about 90 percent of the incremental hedging that has occurred in recent months came from just a relatively short list of 20 active companies. Hess Corp. topped the list, adding 115,000 bpd of new hedges for 2018. Pioneer Natural Resources came in a distant second with an additional 59,000 bpd of hedged production for next year.
The wave of hedging has showed up in exchange trade data for WTI. The number of open contracts that have yet to be settled has jumped by nearly a quarter since June, according to Reuters. “The reason is producer hedging in USA as well as the funds all being very bullish. Shale producers will use WTI as a hedging instrument and not Brent,” Oystein Berentsen, managing director for Strong Petroleum in Singapore, told Reuters in an interview earlier this month.....MORE