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Crude oil prices are unchanged since the end of last week, despite moving in a $4/bbl range following the announcement by Ineos of the closure of the Forties Pipeline System on 11 December.
As has been typical in recent months, we expect that the rally has enticed a lot of producer hedging as both Brent and WTI structures have shifted lower with a relatively weaker back of the curve clearly indicating producer hedging activity.
US West Texas Intermediate crude goes up 22 cents at $57.85 a barrel while articulating ahead of EIA’s inventory check today.
The combined Brent and WTI futures and options contracts remain very high at 926k lots. The record-high net length presents a big risk to oil structure, in our view, especially if markets were to weaken on the back of increased supply from shale producers in early 2018, any other disrupted supply were to return or refinery processing rates were to decline on seasonal maintenance.
As we enter 2018, this equation should change as producers use swaps for the rest of the year. In terms of pricing, there were more volumes hedged between $50-52/bbl WTI, (refer above chart), followed by slightly higher volumes hedged between $50-51/bbl. Limited volumes were hedged around $51-52/bbl levels.
This clearly is interesting to note as producers were very comfortable around the lower 50’s to hedge. For 2019, producers hedged mostly in the lower 50’s range once again.
Additionally given the volumes hedged is significantly lower in 2019, producers would rather wait and watch and layer in when oil prices get supported intermittently. There is also a trend of smaller producers hedging at slightly lower price levels than the large caps for both 2018 and 2019 but that is still a marginal difference.
However, despite higher hedges in place which might pose risk to oil markets as US producers are typically expected to add more oil on the back of hedged volumes, can they and will they add the extra barrels significantly on top of the hedged barrels which are not typically hedged? We take a look at both upside and downside risks to US upstream production.
