Hedging activity maintains high pace set in Q3

 

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.

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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?

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For more on hedging, see our primer, 'Hedging 101', attached to our report. You may also be interested in:

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