Trading activity in U.S. crude futures has soared since July as American shale drillers take advantage of higher prices by selling future production.
The activity of U.S. drillers has pushed West Texas Intermediate (WTI) trading ahead of Brent crude futures, the international benchmark for oil prices.
Exchange trade data shows that open interest in WTI crude futures trading, which describes the number of open contracts that have yet to be settled, has jumped by almost a quarter since the end of June to 2.6 million.
Open interest for Brent, by contrast, has moved largely sideways for the past months, rarely moving above 2.5 million.
“The reason is producer hedging in USA as well as the funds all being very bullish. Shale producers will use WTI as a hedging instrument and not Brent,” said Oystein Berentsen, managing director for Strong Petroleum in Singapore.
Crude oil prices crashed from above $100 per barrel to below $50 a barrel between 2014 and 2016. A huge supply overhang developed as U.S. shale production soared , while established producers like the Organization of the Petroleum Exporting Countries (OPEC) and Russia also pumped record volumes.
Forced to adapt to lower prices, shale drillers aggressively cut costs and improved well efficiency.
Now that WTI crude futures have risen more than a third price since June, shale producers have raced to lock in profits by selling future production, a trading strategy known as hedging.
Lured by the prospects of rising prices, hedge funds have also massively increased their long positions in crude futures.
But there are doubts whether U.S. hedging will continue at such high levels.
Profitable hedging requires the crude futures price curve to be in contango – when future prices are higher than those for immediate delivery.
When spot prices are higher than those in future, a market structure known as backwardation, then hedging future output becomes less attractive.
As things stand, the six-months forward curve for Brent is in backwardation, while U.S. WTI crude futures still show slight contango in the front-months.
“The WTI structure has flattened to an almost pancaked contango,” said John Driscoll, director of JTD Energy Services. “Contango is a hedger’s best friend so if the market continues to follow Brent into backwardation, hedging will become more challenging.”
Source: ReutersPrevious Next