Surge in U.S. Shale Hedging to Boost 2018 Drilling
When oil prices rocketed towards $60 a barrel this fall, U.S. shale producers hedged more barrels of oil during the quarter than in at least three years, which could help propel the country to record crude production by next year.
More than 144 million barrels were added to hedges, after
global oil markets rallied by as much as $13 in the
quarter. Higher prices help producers lock in profits for future
sales.
That should guarantee that total production exceeds 10
million bpd in 2018, which would be an all-time record for U.S.
drilling. Traders say growth next year will likely exceed
government forecasts, heralding a record year that could
pressure prices in the near term.
For oil traders, hedging data from shale companies serves as
a leading indicator of future supplies.
"After a slow start in the first half of 2017, U.S. oil
producers sped up hedging activities for their 2018 production
in third quarter amid the rebound in crude oil prices,"
Citigroup analysts said in a note last week.
According to a Reuters analysis of hedging disclosures by
the 30 largest U.S. shale firms, most rushed back into hedging
in the three months to Sept. 30.
In total, 17 companies increased outstanding oil options,
swaps or other derivatives positions by 144 million barrels
between the second and third quarter. Another 10 companies
decreased their hedging positions by 31 million barrels; three
others did not hedge at all.
Together, the companies have nearly one-third more barrels
hedged, or the equivalent of 129 million barrels, compared to
the previous quarter. Reuters compiled the data through information publicly
available in quarterly regulatory filings.
Citigroup analysts said the third-quarter hedge ratio - the
percentage of production where shale companies have locked in
future sales - for 2018 jumped from 12 percent to 27 percent.
For the same period in 2015 and 2016, producers had locked in 15
and 18 percent of the coming year, they said.
Several firms, including Hess Corp, Newfield Exploration Co and Marathon Oil Corp loaded up
their hedges, and more than doubled volumes last quarter. Together, they added 74 million barrels.
Among the companies that rolled off the most include Anadarko Petroleum Corp and EP Energy .
All 30 firms contacted by Reuters either did not respond to
a request for comment or referred to questions about strategy to
recent earnings calls.
Shale firms are said to have continued adding to hedges in
the fourth quarter. Swap dealer gross shorts data from the
Commodity Futures Trading Commission, an indicator
of producer hedging activity, touched a record in the most
recent week.
Last week, a Texas-based producer was said to have hedged
some 30,000 barrels per day (bpd) for 2018 in U.S. crude
futures, according to two sources familiar with money flows.
PRODUCTION GROWTH
U.S total oil production is expected to rise by 780,000 bpd
to 10.02 million bpd next year, which would be a new annual
record, according to the U.S. Energy Information Administration
(EIA). Traders estimate that growth could be as high as 1.2
million bpd, with at least 500,000 bpd to 600,000 bpd out of
Texas's prolific Permian basin alone.
That could complicate an extension by OPEC to curb global
supplies through 2018 to keep prices low.
But forecasts for new output may be optimistic, said John
Saucer, vice president of research and analysis at Mobius Risk
Group in Houston.
"People have modeled in the absolute perfection when it
comes to drilling. I think we'll see new growth, but there's a
lot of evidence that getting new fracking and completion crews
is tough," he said.
Drilled but uncompleted wells rose for a 12th straight month
to a record in November, according to EIA data dating to
December 2013.
Despite greater levels of hedging, and the rise in
production, the U.S. crude forward curve remains in
backwardation, a market structure where near-term prices are
higher than those in the future.
On Wednesday, WTI for December 2019 was trading around $2.46
a barrel over WTI for December 2018 <CLZ8-Z9>. That spread, a
popular trade, signals the health of the oil market.
That implies U.S. supply is unlikely to overwhelm global
markets, Saucer said.
Reporting by Catherine Ngai
