Kemp: Rising Oil Prices Throw Lifeline to Shale Producers

Kemp: Rising Oil Prices Throw Lifeline to Shale Producers
Brent prices for 2017 ended trading above $50 per barrel on Wednesday for the first time since mid-December following the largest and most sustained rally in prices since the oil slump started.

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, April 28 (Reuters) - Brent prices for 2017 ended trading above $50 per barrel on Wednesday for the first time since mid-December following the largest and most sustained rally in prices since the oil slump started.

The average for the 12 futures contracts expiring in 2017, called the calendar strip, has risen by 34 percent from its recent low of $37.45 on Jan. 20 to $50.26 on April 27 ().

Spot prices, represented by the nearest futures contract, dominate the headlines and are of most interest to analysts and financial investors.

Most hedge funds and other money managers concentrate on nearby futures contracts because they are the most liquid.

Calendar strips for future quarters and years are far less prominently reported in the media and analyst commentaries.

But the majority of crude producers and consumers such as airlines rely on calendar strips to hedge future sales and purchases.

For producers struggling to meet debt payments and avoid breaching the terms of loan covenants, rising prices are a chance to lock in future revenue and reduce downside risks.

Many producers, especially in the U.S. shale industry, must be hoping prices continue to rise in the second half of 2016 and through 2017 as the oil market rebalances.

But the calendar strip has already risen to the point where it is line with the average price forecasts for 2017 made back at the start of March.

At that point, half the respondents to a broad price survey expected prices to average between $45 and $55 per barrel in 2017.

By remaining unhedged, producers have the chance to benefit from further price increases. But any pull back could put their very survival at risk.

For many shale producers, the difference between an average price of $35 and $50 per barrel is the difference between insolvency and survival.

Prudence counsels most shale producers should protect part, if not all, of their production for 2017 at current price levels against any reversal.


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Copyright 2016 Thomson Reuters. Click for Restrictions.

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Brent Crude Oil : $54.46/BBL 0.96%
Light Crude Oil : $51.68/BBL 1.21%
Natural Gas : $3.44/MMBtu 1.99%
Updated in last 24 hours