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Surge in oil hedging could worsen US supply glut: Wood Mackenzie

  • SOURCE: | qwesa2big
  • oil-rigA surge in oil hedges will spur drilling activity in the U.S., Wood Mackenzie said in a report released on Monday, likely keeping a supply response in place longer than expected even if spot prices fall sharply.

    “Those hoping that recent oil-price weakness will prompt U.S. producers to pull back drilling activity and ease the glut of oil supply may need to keep waiting,” said the consultancy.

    U.S. West Texas Intermediate crude oil traded around $48 a barrel on Tuesday, some 15 percent lower year-to-date because of concerns over rising U.S. production and uncertainty over whether OPEC and other key producers will extend production cuts totaling nearly 1.8 million barrels per day (bpd) into the second half of the year. Brent oil prices traded around $51 a barrel, about 12 percent lower year-to-date.

    But according to recent disclosures, producers have rushed to hedge, or lock in, oil prices above $50 a barrel after OPEC’s November announcement to cut production.

    In its analysis of 33 of largest upstream companies with hedging programs, Wood Mackenzie found that the companies have added an annualized 648,000 barrels a day of new oil hedges since the fourth quarter of 2016, an increase of 33 percent from the third quarter of the year and more than in any of the previous four quarters.

    “Those producers – most of which are highly exposed to U.S. (shale) – will use hedging gains to help plug any budget deficits caused by sub-$50 spot prices,” said Wood Mackenzie research analyst, Andy McConn.

    Most of the new oil derivatives were added at strike prices between $50-$60 a barrel, he added.

    But hedging’s effect on oil-supply fundamentals should not be overstated as most of the hedges will expire by 2018, McConn said.

    “Oil futures prices must recover before producers can lock in prices over US$55 a barrel for next year, which is what we think is needed to organically fund significant (shale) oil production growth,” he said.

    Source: CNBC

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