HOUSTON/LONDON/SINGAPORE, 25 March 2017 — Wood Mackenzie's latest analysis of oil and gas hedging activity shows a recent surge in oil hedges.
Those hoping that recent oil-price weakness will prompt US producers to pull back drilling activity and ease the glut of oil supply may need to keep waiting.
Andy McConn, research analyst at Wood Mackenzie, explains why recent hedging activity will keep drilling levels buoyant during periods of low oil prices: "Recent disclosures reveal that producers rushed to lock in oil prices above US$50 a barrel after OPEC's November announcement about production cuts. Our peer group of producers added a higher volume of oil hedges during Q4 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-US$50 spot prices."
But 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 US$55 a barrel for next year, which is what we think is needed to organically fund significant tight-oil production growth," says McConn.
Hedging activity surged for oil, but plummeted for gas
The latest oil hedging activity in Wood Mackenzie's analysis of companies, comprising a group of 33 of the largest upstream companies with active hedging programmes, shows that companies added 648,000 barrels a day (annualised) of new oil hedges since Q4 2016, which is an increase of 33% from Q3 2016.
Most of the new oil derivatives were added at strike prices between US$50 and US$60 a barrel.
Apache and Anadarko added the most oil hedges, accounting for 28% of all new volume added.
According to Wood Mackenzie's analysis of hedging activity in Q4 2016, gas hedging activity was more subdued, mainly because producers already held healthy positions for 2017.
The analysis shows 2.2 billion cubic feet a day of new gas hedges were added in Q4 2016, down 57% from Q3 2016.
Most of the new gas derivatives were added at strike prices between US$3.00/mcf and US$3.60/mcf Henry Hub.