Oil hedging for 2020 is below average for a majority of U.S. producers, but one single producer has helped perk up 2020 hedging for the whole sector, according to Goldman Sachs.
Among the 25 producers covered by the investment bank, a near average 22% of 2020 oil production was hedged at an average price of $55.50 per barrel through the second quarter, up from 9% of 2020 oil production at the end of the first quarter. This marks a premium to the current 2020 oil strip prices of $53/bbl, lead analyst Brian Singer said in an Aug. 19 research note.
However, much of that total increase in hedging came from Occidental Petroleum Corp., which represented seven percentage points of that 22% total, compared to none of the total at the end of the first quarter, as the company initiated a hedging program ahead of its acquisition of Anadarko Petroleum Corp., Singer said. The acquisition was completed on Aug. 8 when Anadarko shareholders voted to approve the deal.
Excluding Occidental, other producers covered by the investment bank are hedged below historical averages, Singer said, noting that "continued broader oil macro uncertainty combined with lower prices [is] likely influencing hedging levels."
From the end of the first quarter and through the beginning of the second quarter, West Texas Intermediate crude oil prices averaged around $60/bbl, above broader longer-term management expectations of $50/bbl to $55/bbl, Singer said. "However, more recently, concerns on 2020 oil demand, US supply, and OPEC spare capacity have driven strip prices lower," he said.

The International Energy Agency on Aug. 9 lowered its global crude oil demand growth forecasts for 2019 and 2020 by 8.3% and by 3.7%, respectively, citing concerns about the continued worsening of the global economy. The U.S.-China trade dispute remains unresolved, and new tariffs are due to be imposed in September. As tensions escalate, volatility has increased in stock and commodity markets, the IEA said.
On the supply side, "Continued Middle East tensions present risks of supply disruptions and higher crude oil prices," the U.S. Energy Information Administration said Aug. 6 in its "Short-term Energy Outlook." However, the agency also noted crude oil transit in the region has not been significantly disrupted to date.
"The combination of oil supply disruption risk and lower economic growth expectations creates uncertainty in the pace of global oil inventory withdrawals and prices," the EIA said. "Prices could break out of the mid-$60 [per barrel] range if the supply or demand concerns materialize in the coming months."
The EIA projected WTI spot crude oil prices to decline to an average of $57.87/bbl in 2019 before climbing to $59.50/bbl in 2020. The 2019 projection is down 2.9% from the prior forecast, while the 2020 projection is down 5.6%. WTI prices averaged $65.06/bbl in 2018.
Singer said the "broader oil macro uncertainty" has contributed to lower than usual forward-year hedging activity for all of the U.S. exploration and production companies covered by Goldman Sachs except for Occidental.
"As the industry begins the budget planning process over the coming months, we broadly expect E&Ps to maintain their longer-term expectations of $50-$55/bbl WTI barring greater evidence of weaker demand or sub-$50/bbl sustained oil prices," he said.
