A closer look at the surge in US crude oil hedging.
The oil and gas industry is entering 2018 with a degree of renewed confidence. The oil price has picked up to a 3-year maximum hitting US$70 per barrel due to the current demand supply rebalancing and future demand expectations. The gas side also looks optimistic. In 2017, Gazprom exported a record amount of 193.9 billion cubic meters of natural gas to Europe breaking last year’s results. This demonstrated its growing role in the European energy supply. At the same time, the US LNG exports have also achieved a record level of average 1.9 billion cubic feet (approximately 54 million cubic meters) per day in 2017, making the USA a net exporter of natural gas. Taking all the facts into account, overall, the renewed demand confidence may lead to renewed investments in the sector in 2018.
– Anton Oussov, Global Head of Oil & Gas and Head of Oil & Gas in Russia and the CIS, KPMG in Russia
As crude oil prices have surged in recent months on a combination of falling inventories as a result of OPEC/non-OPEC production cuts and perceptions of heightened geopolitical risk, US shale oil producers have begun to lock in profits and volume growth by hedging large volumes of their anticipated 2018 production. As the net-long positions of money managers have risen, the net-short position of 'swaps dealers' in the data from the US Commodity Futures Trading Commission (CFTC) have pushed into record territory, which is an indicator of hedging by producers. Even with the steep backwardation in WTI crude oil at the moment, all of the 2018 WTI futures contracts are trading above US$60 per barrel, which allows producers to lock in profitable production on a wider amount of production acreage than would have been possible at the lower price range just a couple of months ago. This surge of hedging will put a floor under US production growth in the second half of the year, even if prices have moderated by then or demand growth has slowed. That in turn could make for more price volatility if some of the geopolitical risks currently impacting prices - particularly related to Iran - fail to actually impact production volumes. With short-cycle supply like US shale production, notional risks priced into the market can become extra supply volume on a much shorter timeframe.
- Greg Priddy, Director, Oil, Eurasia Group*
*Guest contributor for January edition
Note: The forecasts/analyst estimates above from Brent & Henry Hub are an indication based on third party sources and information. They do not represent the views of KPMG.