Face the Future

Oil's Jump is Eye-Catching, But Look Here Instead

Swaps contracts used for hedging by producers may have more to say about the longer-term outlook for crude.
Photographer: Daniel Acker/Bloomberg

Explosions over Riyadh and expected explosions in Syria appear to be having the expected effect on oil prices:

Launched

Crude oil prices jumped Wednesday on news, and expectations, of further turmoil in the Middle East

Source: Bloomberg

Note: Intraday pricing as of ET.

West Texas Intermediate crude oil jumped above $67 a barrel on Wednesday morning, reaching its highest level since December 2014.

Meanwhile, another, less obvious, marker nudged above $60. That's the price of WTI swaps for 2019, now trading at their highest level since summer 2015:

Sixty Back

Crude oil swaps for 2019 nudged above $60 a barrel on Wednesday for the first time since September 2015

Source: Bloomberg

These matter because they are the basis for hedging by U.S. exploration and production companies, allowing them to lock in higher prices for future production. For many of these firms, $60 a barrel is akin to saying frack, baby, frack.

Less than 10 percent of expected oil production in 2019 is hedged so far, according to a Goldman Sachs report published last month. As I wrote here, producers in the prolific Permian basin are facing challenges in getting their oil to market, resulting in some barrels being priced at discounts. There is also more pressure these days to live within cash flow and prioritize returns over sheer production growth, as evidenced by an upturn in shareholder activism.

Few things relieve such pressure, however, quite like a geopolitical premium creeping back into oil prices. Actual disruptions to supply are far more likely to materialize in places like the Middle East or Venezuela than in Texas, where such fears feed straight into the bottom line. While hedge funds delight in that jump in near-month oil futures, expect producers to focus on those 2019 contracts -- and start laying the foundations for higher output.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Liam Denning in New York at ldenning1@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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