$55USD/b for 2018 needed to “organically fund” significant tight-oil production growth
Those hoping that recent oil-price weakness will prompt US producers to pull back drilling activity and ease the glut of oil supply may need to keep waiting. Wood Mackenzie’s latest analysis of oil and gas hedging activity shows a recent surge in oil hedges.
“Recent disclosures reveal that producers rushed to lock in oil prices above US$50 a barrel after OPEC’s November announcement about production cuts. Our peer group of producers added a higher volume of oil hedges during Q4 than in any of the previous four quarters,” said Andy McConn, research analyst at Wood Mackenzie.
Those producers – most of which are highly exposed to US tight oil – will use hedging gains to help plug any budget deficits caused by sub-US$50 spot prices.”
But hedging’s effect on oil-supply fundamentals should not be overstated.
“Most of the hedges expire by 2018. 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 tight-oil production growth,” said McConn.
Hedging activity surged for oil, but plummeted for gas
The latest oil hedging activity in Wood Mackenzie’s analysis of companies, comprising a group of 33 of the largest upstream companies with active hedging programmes, shows that companies added 648,000 barrels a day (annualised) of new oil hedges since Q4 2016, which is an increase of 33 per cent from Q3 2016.
Most of the new oil derivatives were added at strike prices between US$50 and US$60 a barrel. Apache and Anadarko added the most oil hedges, accounting for 28 per cent of all new volume added.
According to Wood Mackenzie’s analysis of hedging activity in Q4 2016, gas hedging activity was more subdued, mainly because producers already held healthy positions for 2017.
The analysis shows 2.2 billion cubic feet a day of new gas hedges were added in Q4 2016, down 57 per cent from Q3 2016.
Most of the new gas derivatives were added at strike prices between US$3.00/mcf and US$3.60/mcf Henry Hub.
Oil hedge activity
“Hedge price disparities are due to price volatility, contract structures and hedge dates. Predictably, the biggest gas players accounted for most activity: Southwestern, Encana, Range and Chesapeake accounted for 62 per cent of new volumes added,” said McConn.
Simpler swap contract styles are slowly returning to popularity, accounting for 38 per cent of new derivatives – versus 25 per cent in Q3 2016, but still below the 42 per cent and 66 per cent proportions during Q2 and Q1 2016, respectively.
“The outlook for hedging activity seems poised to plateau or decline,” said McConn.
At this early stage of the year, the peer group already has a higher proportion of its liquids production hedged than the prior two years with 26 per cent in 2017 versus 24 per cent and 23 per cent in 2016 and 2015, respectively. The same is true for gas with 42 per cent in 2017 versus 32 per cent and 28 per cent in 2016.
“As companies consider adding new hedges, OPEC comments and plans are likely to play a larger-than-usual factor,” said McConn.