E&Ps Locking in Cash Flows and Sales Prices

OPEC’s agreement to cut production levels has kicked off a rush among shale oil companies to hedge their oil price risk above $50 for 2017 and 2018. The number of E&Ps selling oil for delivery next year has pushed the WTI forward curve into slight backwardation after two years of contango.

OPEC Cut Puts Forward Curve in Backwardation for First Time in Two Years

Source: Bloomberg

Compare this with Bloomberg’s chart published yesterday.

OPEC Cut Puts Forward Curve in Backwardation for First Time in Two Years

Source: Bloomberg

By locking in future cash flows and sales prices, producers will be more likely to result in higher U.S. production in the coming years, which will potentially offset the output cut. This follows a trend of increased hedging among E&Ps this fall as oil futures have hit the mid-$50s on positive OPEC news.

Although independent E&Ps usually reveal hedging levels on a quarter delay, Bloomberg reported that U.S.-based oil bankers and brokers said they handled large volumes of contracts after OPEC agreed to cut production.

Bloomberg reports that a record 580,000 crude options traded on the NYMEX on November 30, with the number of puts hitting the highest levels seen since 2012. Puts grant the buyer the right to sell the underlying at a minimum price.

Will OPEC Follow Through and Can non-OPEC Barrels Be Cut?

Doubts about whether OPEC and Russia will continue to curb their output in six months when the deal could end have kept pressure on forward prices. OPEC reported pumping a record 34.16 MMBOPD in November, before the meeting.

Global oil prices fell today on the reports of record OPEC production, spurring doubts as to how serious the cartel members will be in cutting their production by the promised amounts reported during the December 1 meeting in Vienna.

OPEC Cut Puts Forward Curve in Backwardation for First Time in Two Years

The focus is now on whether any non-OPEC members will join Russia in reducing output at a meeting in Vienna this Saturday. OPEC hopes the meeting will result in a further 300 MBOPD cut from world supply than Russia’s pledged 300,000.


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