U.S. Crude Continues Climb, but Producer Hedging Emerges at $58

14 Mar 2019

U.S. Crude Continues Climb, but Producer Hedging Emerges at $58

By Barani Krishnan

The higher WTI goes, the greater the inclination for producer hedging.

U.S. crude futures rose for a fourth-straight day on Thursday, with oil bulls riding the momentum of the previous session's 2% rally, which came on the heels of unexpectedly bullish supply-demand data released by the government.

But gains in the latest session were small, limited by talk -- and at least some emerging signs -- that producers were lining up to hedge, or sell, their supply after the West Texas Intermediate benchmark crossed the critical $58-per-barrel resistance on Wednesday. And while WTI rose again, U.K. peer and global benchmark Brent fell, showing headwinds building against an oil rally that many say still defies weakening global economic data, particularly from China and Europe.

WTI was up 35 cents, or 0.6%, at $58.61 per barrel by 12:53 PM ET (16:53 GMT), hitting a new 2019 high of $58.74 earlier. The four-day rally was WTI's biggest winning streak in a month, putting the U.S. crude benchmark on track to a weekly gain of more than 4%.

Brent, meanwhile, fell 13 cents, or 0.2%, to $67.42. But it remained on course to a gain of 2.4% on the week.

More importantly, WTI's outperformance versus Brent has narrowed the gap between two, upending spread positions held by many traders who had expected the differential to remain steady at around $10 a barrel in the U.K. benchmark's favor. In Thursday's trade, the gap was down to around $8.75 or so.

Many now expect WTI to take out the all-important $60 per barrel resistance, especially after the U.S. Energy Information Administration revised downward on Tuesday its crude production forecast for 2019, saying it had overestimated output expectations for the Permian shale oil basin in December, January and February.

The EIA also shocked the market on Wednesday by saying that U.S. crude oil inventories fell by 3.86 million barrels in the week to March 8 versus forecasts for a stockpile build of 2.66 million. In the previous week, inventories surged by 7.07 million barrels. It added that gasoline inventories fell sharply too, by 4.62 million barrels, compared to expectations for a draw of 2.53 million.

These and other data have added support to the market on top of the aggressive production cuts by OPEC that have already given WTI a gain of nearly 30% on the year.

Despite the bullish sentiment, some are warning that a wall of new crude supply could hit the market in coming months as WTI above $58 a barrel was too enticing for producers to pass up.

Brazil's Petrobras, for instance, has bought $60 puts for June, August and September in anticipation that WTI will get to that level in coming weeks "and it can protect the $60 floor to sell its production", said a trader familiar with the company's hedging plan.

"We are ... now entering a price-zone where producers should start to increasingly think about hedging," Switzerland-based consultancy Petromatrix said in a note. "U.S. crude oil differentials are firms and on an outright basis, the U.S. crude oil grades are at relatively firm levels."

And although the EIA has scaled back its immediate expectations for U.S. shale output, it is sticking to its forecast that the oil market will remain oversupplied by about 400,000 bpd in 2019.

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