Hedging

Lower crude oil prices whack oil-directed drilling, slashing crude production, which cuts associated gas output, tightening the gas supply-demand balance, and boosting gas prices enough to spur more gas-directed drilling — it’s a classic case of commodity market schadenfreude, where one product benefits at the expense of another. That’s the way it was supposed to work, according to various trading strategies touted a few weeks back. But here we sit, with crude oil prices still around $40/bbl and gas prices languishing at a paltry $1.66/MMBtu. Was there something wrong with the schadenfreude thesis, or do we have to look deeper to understand how prices will behave in this convoluted COVID era? In today’s blog, we’ll explore this question and what it may mean for natural gas prices in the coming months.

After reducing capital expenditures by 70% in 2014-16, U.S. exploration and production companies (E&Ps) have collectively taken their foot off the brake and stomped on the gas, boosting 2017 capital outlays by an impressive 42% to kick-start production growth. At first glance, the move may seem somewhat reckless. After all, E&Ps just weathered a crisis caused by plunging oil prices partially through impressive capital discipline, and the price for benchmark West Texas Intermediate (WTI) crude oil has once again drifted below $50/bbl over concern that U.S. output may be rising too fast. But as we’ve learned from a new report by our friends at Bloomberg Intelligence, most major U.S. oil producers paired their increased investment with significant oil-price protection, aggressively snapping up hedges in late 2016 as oil prices were buoyed by the announcement of planned OPEC output cuts. Today we review BI’s examination of the efforts by many E&Ps to lock in $50/bbl-plus prices for much of their 2017 production.

Throughout 2012 and into this January natural gas producers have done far more hedging than consumers with the Henry Hub NYMEX futures contract. Producers are still locking in higher prices on the forward curve to protect the value of their future production in the ground. Today we review trends in hedger sentiment.