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The flurry of
dealing kicked off when prices pierced $45 per barrel earlier in
April. It picked up in recent weeks, allowing producers to
continue to pump crude even if prices crash anew.
While it was not clear if oil prices will remain at current
levels, it may also be a sign producers are preparing to add
rigs and ramp up output.
This week, Pioneer Natural Resources Co <PXD.N>, a major
producer in the Permian shale basin of West Texas, said it would
add rigs with oil prices above $50 per barrel.
Selling into 2017 tightened the structure of the forward curve,
with December 2017's premium to December 2016 <CLZ6>, known as a
contango, narrowing to $1.30, its tightest since June 2015. That
spread had been as wide as $2.15 a barrel just four days
earlier.
Open interest in the December 2017 <CLZ7> WTI contract was at a
record high of 122,533 lots on Friday, up about 20,000 lots from
the start of April.
"U.S. producers have been quick to lock in price protection as
the market rallies given that the vast number of companies
remain significantly under hedged relative to historically
normal levels," said Michael Tran, director of energy strategy
at RBC Capital Markets in New York.
It was not clear which companies embarked on the forward
selling. In the past a handful of producers such as Anadarko
Petroleum <APC.N> have sporadically hedged in large chunks.
But trade sources pointed to increased activity among financial
instruments for the balance of 2016, calendar year 2017 and even
2018.
The uptick in producer hedging activity came as benchmark West
Texas Intermediate (WTI) futures finished April up 20 percent
for the biggest monthly increase in a year. Prices have
rebounded by as much as 80 percent on expectations of falling
U.S. production after touching a 12-year low in February.
On Friday, Baker Hughes reported oil drillers removed another 11
from operation the week to April 29, bringing the total oil rig
count to 332, its lowest since November 2009.
The calendar 2017 strip <CLCALYZ7> week climbed to $49.44 on
Thursday, its strongest since early December. In January, it had
traded as low as $37.38 a barrel.
To outlast the downturn, many producers like Continental
Resources <CLR.N>, are deferring completions on already drilled
wells, known as DUCs.
"There are some companies that will hedge at $45 and $50, giving
them more incentive to bring those DUCs on line," said Hakan
Carapcioglu, an energy market analyst with Ponderosa Advisors, a
Denver-based consultancy.
To be sure, many have questioned the fundamentals backing the
recent oil rally, particularly as U.S. crude inventories
currently stand at a record 540.6 million barrels, according to
the latest data from the Energy Information Administration.
[EIA/S]
(Reporting by Liz Hampton; Editing by David Gregorio and Alan
Crosby)
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