Page 5 - NorthAmOil Week 01

NorthAmOil COMMENTARY NorthAmOil
hedges since January 3, Bloomberg reported, citing sources familiar with the trades. The firms in question used a combination of options strat- egies, including spreads and collars, to lock in the highest selling prices in months, the news service added.
This comes after earlier findings by Bloomb- erg New Energy Finance (BNEF) that the 13 largest producers it tracks had hedged an average of 13% of their 2020 output as of September 30. Half of the 12 largest producers had no hedges in place as of that date.
The average price for US crude for the whole of 2020 closed above $60 per barrel on January 3, and Bloomberg said a number of large trades in the financial options market were booked that day. This included some average-price options in the form of three-way collars on the New York Mercantile Exchange (NYMEX) for 2020 and 2021, the news service added. Such a strategy involves a producer buying put spreads while selling calls to offset the cost of the insurance. Put spreads offer protection against a drop in prices, but the strategy limits how much addi- tional profit the producer can make if prices keep rising. These moves suggest that the producers in question did not expect the rally to last long, and price movements by press time appear to back up these expectations.
Reprieve
The ability to hedge production at higher prices offers producers some reprieve at an otherwise increasingly difficult time for the US shale indus- try. Growth is widely anticipated to slow this year amid a combination of ongoing investor pres- sure to focus on capital discipline, bearish price expectations and operational issues.
The latest report from the Dallas Federal
Reserve, released in late December, showed that activity in the US oil and gas industry dipped again in the fourth quarter of 2019, according to a survey of oil and gas executives. However, the Federal Reserve noted that the business activity index – the survey’s broadest measure of condi- tions facing energy firms in the Eleventh Dis- trict, which encompasses Texas, southern New Mexico and northern Louisiana – improved, despite remaining in negative territory. The index eased from -7.4 in the third quarter to -4.2 in the fourth quarter, which suggested that the pace of contraction had slowed.
US oil production has continued to grow, but the US Energy Information Administration (EIA) agrees that the pace of growth will slow this year. The agency has forecast that US crude output will average 13.2mn barrels per day in 2020, marking increase of 900,000 bpd year on year. This would mark a more pronounced slow- down after output grew 1.3mn bpd y/y in 2019, down from 2018 growth of 1.6mn bpd y/y.
US shale producers are expected to cut spending by 12-15% this year, Reuters reported, citing oilfield consultancy Spears & Associates’ vice-president Richard Spears. He added that any improved profits from higher than expected oil prices would likely go toward paying down debt and returning dividends to shareholders.
In this environment, any temporary increase in the crude price is likely to lead to additional hedging. And hedging, in turn, could help prop up shale producers, assuming crude prices do not rise above the price they hedged at. But with profits likely not being reinvested into new growth, and instead going towards dividends and debt repayments, growth seems set to slow regardless of how long oil prices remain elevated as the situation in the Middle East plays out.™
The ability to hedge production at higher prices offers producers some reprieve at an otherwise increasingly difficult time.
US shale drillers need to respond quickly if they want to lock in higher prices through hedging.
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