4Q16 Hedging Flurry | Russell T. Rudy Energy LLC
“Rigzone” reports that consulting firm, Wood Mackenzie, warns that hedging activity could exacerbate the global oil glut. Back in November of 2016, OPEC and 11 non-OPEC producers all announced their intention to cut back on oil production in order to reduce the world-wide surplus and improve prices. This drove oil prices up and many U. S. producers immediately sold contracts for future production which locked in prices ranging from $50-60 per barrel. Led by Apache and Anadarko, some of the largest upstream companies have continued to hedge future production.
One would think that the recent drop in oil prices to below $50 would prompt domestic producers to cut back on drilling activity. However, having locked in higher prices through the end of this year, they are flush with cash and using it to increase production capacity. This in turn could more than offset the production decreases agreed to last November, and make the oil glut even worse. Wood Mackenzie fears that when the current hedge contracts expire, the glut will have depressed prices to the point that domestic producers will not have the funds available to invest in future production capacity.
One would think that hedging would bring stability to the market. However, that does not appear to be the case. In fact, Wood Mackenzie’s Andy McConn cautions, “As companies consider adding new hedges, OPEC comments and plans are likely to play a larger-than-usual factor.”
We might be in store for a wild ride.
To read the article in its entirety, Please go to http://www.worldoil.com/news/2017/3/27/surge-in-oil-hedging-could-worsen-us-supply-glut-wood-mac-says .
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