U.S. OIL PRICES UP
Under pressure from their lenders, cash-strapped US shale companies risk snuffing out oil's nascent recovery by rushing to lock-in higher prices through the sale of future production.
Oil prices have rallied by almost 50 per cent since dropping below $30 a barrel in January, tempting producers to grab any price that will allow them to keep operating through the worst commodity crash in more than 20 years.
The number of active US oil futures contracts for delivery in December 2017 has leapt by almost 40 per cent since January, data from exchange operator CME Group show, in a clear indication of increased hedging activity.
Heavily indebted producers operating in the shale fields of North Dakota and Texas are some of the most exposed to a prolonged price slump, and US banks, which are reviewing their lending to the sector, are leaning on them to find ways to ensure they can keep going.
The benchmark West Texas Intermediate contract for delivery in December 2017 has reached $46 a barrel in the last eight weeks, a price level at which an increasing number of companies believe they can be profitable.
Some smaller producers that have had to hedge have also bought call options so they can still benefit if prices continue to recover. Open interest in the $50 call option for December 2017 has risen more than sixfold to around 13,000 contracts since the beginning of the year.
Another indication that producers have been selling contracts for later delivery is that spreads have narrowed. The price difference between WTI contracts for immediate delivery and December 2017 has shrunk to around $8.40 a barrel, from more than $12 a barrel in mid-February.
The price recovery is also complicating efforts between major producing countries to agree to freeze production.
While oil remains well below the $100 a barrel level it averaged between 2010 and 2014, the recent recovery has reduced the pressure on Opec and non-Opec countries to reach a quick deal.
Plans to meet in Moscow on March 20 have reportedly been pushed back, as countries disagree over the location, date and how to include Iran, as sanctions targeting its exports were only lifted two months ago.
Brent crude oil, the international benchmark, slipped 3 per cent to below $40 a barrel yesterday while WTI fell 2 per cent to $37.50 a barrel as traders took profits after the recent recovery.
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REUTERS - Brent crude futures LCOc1 were down 72 cents at $61.49 per barrel at 1020 GMT, having fallen by 1.5 percent on Tuesday, its largest one-day drop in a month. U.S. West Texas Intermediate (WTI) crude CLc1 was at $55.12 per barrel, down 58 cents.
BLOOMBERG - Prices dropped during the session as the International Energy Agency said the recent recovery in oil prices, coupled with milder-than-normal winter weather, is slowing demand growth. The worsening outlook for consumption dampened some of the enthusiasm that OPEC and its allies will extend supply curbs.
Global energy needs rise more slowly than in the past but still expand by 30% between today and 2040. This is the equivalent of adding another China and India to today’s global demand.
Product exports have grown significantly over the past several years and are expected to continue to grow as Russian refineries add capacity to produce more high-quality products.