Brent crude oil decreased to 64.25 USD/BBL in May from 64.57 USD/BBL in April of 2015. Brent is beginning the new week of trading largely unchanged at $65.36 per barrel.
In recent past it was perfect gamble on the US oil production will fall; many speculators have played a major part in driving oil prices up by 50% in the past four months. But later Q1 the speculative net long positions in WTI climbed for the fifth time in the past six weeks and currently find themselves at their highest level since early July 2014.
Brent optimism among speculative financial investors recently grew in seven weeks in a row and is now at its highest level since the data series began in early 2011. The ICE will be publishing new market positioning data at lunchtime today. The price rise in the reporting week makes a further increase in speculative net long positions probable. If the production outlook in the US were to be reassessed and if investors were to withdraw as a result, oil prices risk seeing a radical correction.
We reckon the Brent crude oil is to decrease to 56.58 US$/BL in May of 2015 but remain in range bound target of around 61.52 to 68.25 in Q2. In the long-term perspective, probably earlier quarters of 2016 the Brent crude oil is projected to trend around 67.63, 70.51 US$/BL.
Hedge Falling Crude Oil Prices using Derivative Futures:
Crude Oil producers can utilize short hedge to lock in a future selling price for an ongoing production of crude oil that is only ready for sale sometime in the future.
To build the short hedge strategy, crude oil manufacturers short enough Crude Futures contracts in the futures market to cover the quantity of crude oil to be produced.
How to execute: Let's suppose, an oil mining corporation has come in into a contract to sell 100,000 barrels of crude oil that is to be delivered in 3 months' time. The futures price is to be based on the prevailing market price of crude oil on the day of delivery. Suppose, when entering into a contract the spot price for crude oil is USD 65.00/bl while the price of crude oil futures for delivery in 3 months' time has slashed to US$ 58.00/barrel.
To lock in the selling price at USD 65.00/barrel, the oil corporation will enter a short position in an NYMEX Brent Crude Oil futures contracts. With each NYMEX Brent Crude Oil futures contract covering 1,000 barrels of crude oil, the oil mining corporation will be required to short 100 futures contracts.
The desired outcome of this strategy, the hedge should ensure that irrespective of market price the oil extraction company will be able to sell the 100,000 barrels of crude oil at USD 65.00/bl for a total amount of USD 6,500,000.
