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Crude Oil Hedging for Producer

September 10, 2013

R^2,

 

Please provide your insight along with some historical charts for Cal ’14 oil. We are considering a 200 bopd LLS swap. Please provide a midmarket indication as well.

 

Sincerely,

Upstream Producer

 

Comments/Color:

R^2 has been advocating crude oil hedging for producer essentially all summer. The reasons behind this are:

  • Speculative length of long positions is at an ~all-time record
  • Pricing location is for Cal 2014 is above the average settlement of the past ~3 years (about $89/bbl)
  • US production increases (+1M bbls yoy growth) and demand destruction (-2% average yoy) give backdrop of unsupported fundamentals.The oil expense indicator (oil expenditures divided by GDP, currently about 5%) is very high and implies either a reduction in oil prices or a recession or possibly both, because oil is a drag on growth at current higher prices.
  • Geopolitical “bark” is usually worse than the “bite,” historically speaking (and we are seeing some of the Syria risk premium let out of the market today)

 

Midmarket indics:

WTI $96.14

Brent $103.31

LLS $101.61

 




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