Oil and gas hedging activity skyrocketed in Q3 to the highest level in a year. Will activity climb higher in Q4 as prices break through the US$50/bbl threshold? Our corporate research experts look at the Q3 numbers and analyse hedging volumes, trends as Q4 wraps up, and what's to come in a post-OPEC-cuts 2017.
Oil and gas hedge volume soared in Q3 2016 — more than in any of the prior three quarters. What drove this surge in activity? And what conclusions might we draw as Q4 comes to a close and we enter 2017 with historic production cuts by OPEC?
Covering a peer group of 32 of the largest upstream companies with active hedging programmes, our analysis shows the volume of oil hedges in Q3 were up 72% compared to Q2, and gas was up 45%. This surge may simply be due to higher oil and gas prices relative to H1 2016, with a majority of derivatives within US$5/bbl of a US$50/bbl (Brent) oil price and a minimum of US$3 per thousand cubic feet of gas (Henry Hub).
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Notably, only three operators were responsible for 42% of the volumes added in oil hedging, and just two of their peers accounted for 58% of gas hedging volumes. The rush to lock in US$50/bbl oil and US$3.20/mcf gas suggests that producers may not have sensed much price upside beyond those levels for the near term. But recent OPEC announcements have altered the outlook.
A recent flattening in the curve for oil-price futures suggests that the pace of oil-hedging activity has remained strong during Q4. Producers appear to be rushing to lock in $55/bbl oil for 2017. The extent of the activity cannot be quantified until producers disclose updates to derivative positions in Q4 results documents. We will be watching for a few key signals:
1) Will Q4 activity exceed the year-to-date highs we saw during Q3?;
2) With several sub-$50/bbl hedges already in place, how much will producers' weighted-average hedge price increase?; and
3) Will the new activity raise 2017 hedge protection to similar levels as 2016 and 2015?
For more on hedging, see our primer, 'Hedging 101', attached to our report. You may also be interested in: