Bullish Oil & Gas Producers Remain Under-hedged

• Oil prices have traded steadily higher from their December lows but remain quite a distance from their 52-week highs attained in late September 2023 when WTI hit $93.68 per barrel.
• According to StanChart, the size of the oil hedge book has declined 9.6% since their last survey in November and now stands at 395 million barrels.
• Standard Chartered: oil markets are in a 'show me' mode.

Oil prices edged up in Wednesday’s session supported by a decline in U.S. crude inventories, Ukrainian attacks on Russian refineries and signs of strong demand. According to weekly data by the U.S. Energy Information Administration (EIA), U.S. crude stockpiles fell by 1.5 million barrels to 446.99 million barrels in the week to March 8, marking the fourth consecutive week of draws, while U.S. crude processing rose by 1.9 percentage point to 86.8% utilization. The American Petroleum Institute (API) reported an even bigger crude draw at 5.521 million barrels, a sharp deviation from the consensus of a 0.4 million barrel build.

The WTI contract for April delivery was up 2.4% at 12:00 hrs ET to trade at $79.44 per barrel while Brent for May delivery rose 2.2 % to $83.73. Oil prices have traded steadily higher from their December lows but remain quite a distance from their 52-week highs attained in late September when WTI hit $93.68 per barrel while Brent peaked at $94.36. Thankfully, many energy analysts remain bullish on the near-and mid-term outlook--and so do oil and gas producers. Commodity analysts at Standard Chartered have conducted a survey on 44 oil and gas companies and found that hedging activity remains low, a sign that producers believe prices are headed higher.

According to StanChart, the size of the oil hedge book has declined 9.6% since their last survey in November and now stands at 395 million barrels (mb). Whereas that figure is 5% above the Q2-2023 record-low, it’s a good 65% below the Q1-2020 record-high.  Hedge ratios for oil output now stand at 25.0% for 2024 and 2.9% for 2025. The current-year oil hedge ratio is 8.8 percentage-points higher y/y but 30.3 ppt lower than in 2018 and 24.8 ppt lower than at the start of the pandemic in 2020. Related: Two Countries That Could Break Putin's Gas Grip On Europe

The gas markets are not much different, with the size of the gas hedge book having declined 9.9% at 8.27 trillion cubic feet (tcf), a record-low across StanChart’s 32-quarter sample. Hedge ratios for gas output stand at 35.0% for 2024 and 15.0% for 2025.

According to StanChart, the average oil swap currently sits at $74.13 per barrel (bbl) on a WTI basis, a record-high over the past 32 quarters and only ~ 2/bbl lower than the current futures strip for the remainder of 2024. The analysts have revealed that the distribution of 2024 put options is steepest in the USD 64.37-66.40/bbl range with 62% of all put option strikes falling in this range. This means this area is likely to be the most sensitive area in terms of downside risk from gamma hedging effects if the markets go awry. Gamma hedging effects do not usually trigger a selloff but can exacerbate it as was the case in the oil markets last May.

StanChart has described the oil markets as being in a ‘show-me” mode whereby prices will likely require a period of visibly tightening fundamentals to make a further significant leg higher, a more supportive rates environment, and consistent upward price revisions by key agencies. 

Source: Standard Chartered Research

Bullish Forecasts

The latest forecasts by the leading energy agencies are bullish.

The latest OPEC Secretariat report increased its Q2 call on OPEC forecast by 321 thousand barrels per day (kb/d) to 28.53 mb/d, 1.96 mb/d above OPEC’s February output. The report also increased its 2024 demand growth forecast slightly by 2kb/d to 2.247 mb/d but lowered its 2024 U.S. crude oil supply growth forecast by 40 kb/d to 300 kb/d. 

Related: This Could Be A Gamechanger For Natural Gas In Europe

Meanwhile, over the past three months, the IEA recently increased its 2024 demand growth forecast by 290 kb/d to 1.22 mb/d. StanChart notes that the gap between the OPEC and IEA demand growth forecasts remains too big at >1 mb/d; however, further closing of the gap in the IEA’s upcoming report will be another bullish sign. StanChart has issued a demand growth forecast for 2024 growth at 1.63 mb/d and another 1.43 mb/d growth in 2025 taking the average for 2025 to 104.2mb/d.

Meanwhile, the European gas markets continue to be flush with the commodity as the current withdrawal season draws to a close. According to Gas Infrastructure (GIE) data, Europe’s gas inventories stood at 70.78 bcm on 10 March, good for a 5.61 bcm Y/Y increase and 21.41 bcm above the five-year average. StanChart has predicted that the continent will finish the withdrawal season with inventory levels above 68 bcm, setting the stage for low summer prices. Dutch Title Transfer Facility (TTF) fell EUR 1.955 per megawatt-hour (MWh) to settle at EUR 24.93/MWh on 11 March;  53% lower y/y and 81% lower than two years ago following Russia’s invasion of Ukraine. 

By Alex Kimani for Oilprice.com

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