WoodMac: Surge in oil hedging
could worsen US supply glut
Due to a surge in oil hedges, the recent oil-price weakness
will not prompt US producers to pull back on drilling, research and consulting firm Wood Mackenzie Ltd. says in its
latest analysis of oil and gas hedging activity.
“Recent disclosures reveal that producers rushed to lock in
oil prices above $50/bbl after [the Organization of Petroleum
Exporting Countries’] November announcement about production cuts. Our peer group of producers added a higher volume of oil hedges during 2016 fourth quarter than in any of
the previous four quarters. Those producers—most of which
are highly exposed to US tight oil—will use hedging gains to
help plug any budget deficits caused by sub-$50[/bbl] spot
prices,” said Andy McConn, research analyst at WoodMac.
However, hedging’s effect on oil-supply fundamentals
should not be overstated. “Most of the hedges expire by
2018. Oil futures prices must recover before producers can
lock in prices over $55/bbl for next year, which is what we
think is needed to organically fund significant tight-oil production growth,” McConn said.
Oil, gas hedge activity
According to WoodMac’s analysis of hedging activity in last
year’s fourth quarter, hedging activity surged for oil, but
plummeted for gas.
The latest oil hedging activity in WoodMac’s analysis of
companies, comprising a group of 33 of the largest upstream
companies with active hedging programs, shows that companies added 648,000 b/d (annualized) of new oil hedges
since fourth-quarter 2016, which is an increase of 33% from
last year’s third quarter.
Most of the new oil derivatives were added at strike prices
between $50/bbl and $60/bbl. Apache Corp. and Anadarko
Petroleum Corp. added the most oil hedges, accounting for
28% of all new volume added.
On the contrary, gas hedging activity was more subdued,
mainly because producers already held healthy positions for
The analysis shows 2. 2 bcfd of new gas hedges were added in fourth-quarter 2016, which was down 57% from third-quarter 2016. Most of the new gas derivatives were added
at Henry Hub strike prices between $3/Mcf and $3.60/Mcf.
“Hedge price disparities are due to price volatility, con-
tract structures, and hedge dates,” McConn said. “Predict-
ably, the biggest gas players accounted for most activity:
Southwestern [Energy Co.], Encana [Corp.], Range [Re-
sources Corp.], and Chesapeake [Energy Corp.] accounted
for 62% of new volumes added.”
Simpler swap contract styles are slowly returning to pop-
ularity, accounting for 38% of new derivatives—vs. 25% in
last year’s third quarter but still below the 42% and 66%