Goldman Sachs: U.S. Drillers Aren’t Hedging Enough

By Irina Slav

Oil producers in the United States are not hedging enough future production while oil prices trend higher, Goldman Sachs has warned.

According to the investment bank, drillers were now focusing more on shareholder returns and improving cash flows than locking in future prices in a bid to make sure they don’t get burned as badly as in 2014 if prices were to crash again.

“We saw a slight uptick in 2019 hedged oil production with 31% of 2019 oil production (vs. 28% with our previous update) hedged at an average price of $57.50/bbl,” Goldman analysts said in a note to clients earlier this week, adding “2019 hedged oil/liquids production is below historical averages post-4Q earnings update. We also note that 2020 hedges remain modest—only 6% of expected production is hedged vs. 4% post 3Q18 results.”

Indeed, U.S. drillers are becoming more cautious. Rig counts are falling and even the Energy Information Administration earlier this month revised down its forecast for average production this year to 12.3 million barrels.

Earlier this year, Goldman revised down its forecast for oil prices in 2019 saying it expected the market to remain oversupplied despite the OPEC cuts, citing U.S. production growth as a driver behind the oversupply. Now prices are higher than they were in January, when the bank issued the forecast, thanks to the OPEC cuts and U.S. sanctions against Venezuela and Iran but this may change.Related: Russia Balks At Continued Oil Production Cut Alliance with OPEC

The threat may come from OPEC itself. During a recent meeting with U.S. bankers, the UAE’s energy minister warned that if U.S. Congress passed anti-OPEC legislation that seeks to make the group accountable for cartel practices, OPEC, which is for all intents and purposes indeed a cartel, would break up and every member would boost production to its maximum.

Indeed, if OPEC starts pumping again at maximum capacity, even without Iran and Venezuela and with continued outages in Libya, it would pressure prices significantly, especially if Russia joins in. This means U.S. drillers are wise in proceeding with caution even if it means they miss out on higher prices by not hedging enough while the rally lasts.

By Irina Slav for Oilprice.com

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