"The Curve Is Screaming Producer Hedging" – Shale Companies Scramble To Lock In Oil Prices
By Tyler Durden
Less than two months ago, after the Algiers meeting but before the Vienna OPEC summit when speculation was rife that the cartel would be unable to reach a deal to cut production, we reported that “US Oil Producers Are Hedging At Levels Not Seen Since 2007” in which we wrote that “while OPEC has been busy desperately jawboning oil higher, US producers have been worried about oil’s reacquaintance with gravity. As a result, as the EIA reports, the amount of WTI short positions held be producers and merchants is just shy of a decade high.”
So now that the OPEC deal is done, if only on paper with formal implementation and compliance checks still up in the air until February 2017 at the earliest, have producers changed their tune?
One look at the changes to the oil strip (shown below) reveals that the answer is no, and as Bloomberg reports, “U.S. shale oil companies are using the post-OPEC rally to hedge their oil price risk for next year and 2018 above $50 a barrel, bankers, merchants and brokers said, pushing the forward oil curve upside down.”
This rush to hedge could lead to a materialization of the biggest risk – and threat – to the OPEC deal: much higher U.S. oil production in 2017, offsetting the first OPEC production output cut in eight years. As such, the producer group could end throwing a life-line to a sector it once tried to crush.
Confirming that while speculators, many of whom have been squeezed as a result of a recent surge in short bets, have thrown in the towel on lower prices for the time being, producers are once again skeptical that the higher prices will prove sustainable: “Right after OPEC, U.S. producers were very active hedging,” said Ben Freeman, founder of HudsonField LLC, a boutique oil merchant with offices in New York and Houston. “We are going to see a significant amount of producer hedging at this levels.”
The hedging pressure triggered violent movements across the price curve. As shale firms sold oil for delivery next year and early 2018 the curve has notably flattened, leading to the first backwardation since 2014 as we observed last week. Sure enough, as Bloomberg highlights today “WTI for delivery in December 2017 is now more expensive than in June 2018- a condition known as backwardation. A week ago, the forward curve was in the opposite shape, known as contango.”
“The curve is screaming producer hedging,” said Adam Ritchie, founder of consultant AR Oil Consulting and a former trading executive at Caltex Australia Ltd. and Royal Dutch Shell Plc.
Another take came from Harry Tchilinguirian, head of commodity strategy at BNP, who said that“The longer dated flattening in the futures curve does indeed reflect to a large extent increased producers activity, hedging on the back of the pop up in spot prices that followed the announcement of an output cut by OPEC.”
In the past year we have shown on various occasions that $50 …read more
Source: "The Curve Is Screaming Producer Hedging" – Shale Companies Scramble To Lock In Oil Prices
