Release date: December 20, 2017 | Next release date: December 28, 2017
U.S. oil companies hedged at least 1.2 million barrels per day of 2018 production
Financial statements from the third quarter of 2017 for 47 U.S. oil production companies indicate that they hedged more than 1.2 million barrels per day (b/d) of crude oil at a weighted average price of $49.63 per barrel (b), locking in some of their revenues at a fixed price even if oil prices decline lower than $50/b. Since the end of the third quarter, weekly data from the U.S. Commodity Futures Trading Commission (CFTC) through December 12, 2017, suggest that producers likely increased their hedged volumes during the fourth quarter of 2017. West Texas Intermediate (WTI) crude oil prices reached their highest levels in more than two years in November and December, allowing many producers to hedge their future production at more than $50/b.
Combined liquids production from these 47 companies averaged 5.3 million b/d in the third quarter of 2017, with nearly 80% coming from the United States. Most of the companies disclosed the volumes of oil they have financially hedged for 2018, collectively totaling more than 1.2 million b/d, or 23% of their total third-quarter 2017 liquids production and 12% of forecasted U.S. crude oil production in 2018, based on EIA's December Short-Term Energy Outlook (Figure 1). Hedging activity varies by producer. Some companies do not hedge at all, while others hedge nearly all of their anticipated 2018 production.
Hedging mitigates price risk and occurs through various mechanisms. Common practices include selling futures or swaps, which allows the holder to lock in a future price for a commodity today. Many companies also use options, which are contracts that give the holders the right to buy or sell a futures contract by a certain date at a certain price.
Companies likely increased their hedged volumes in the fourth quarter of 2017. A leading indicator of hedging activity is the weekly Commitments of Traders (COT) report from the CFTC, which discloses futures and options positions in the category that includes producers, merchants, processors, and users—commercial businesses that trade the physical commodity. Another category including swap dealers can also represent some oil producer hedging, as the category represents entities that hedge futures on behalf of oil companies.
Short positions—selling a futures contract, buying a put option, or selling a call option—in WTI crude oil for these two trader classifications increased by more than 113,000 contracts (9%) from the first week in October through December 12, 2017—the equivalent of almost 114 million barrels. Consequently, short positions in the swap dealers category reached an all-time high (Figure 2). However, the COT report does not specify whether these short positions are for crude oil for delivery in 2018 or future years.
The increase in hedging over the third and fourth quarters of 2017 may have contributed to increased backwardation (when near-term prices are higher than longer-dated prices) throughout the WTI futures curve (Figure 3). The difference compared with last year and last quarter between two consecutive futures contracts through the first 48 WTI contracts averaged -6 cents/b and -3 cents/b, respectively. The contango (when near-term prices are lower than longer-dated prices) in the front part of the WTI futures curve was likely the result of stock builds in Cushing, Oklahoma. Since the first week in October 2017, however, stocks in Cushing declined 10.8 million barrels, contributing to the recent backwardation in near-month WTI contracts. Combined with producer hedging that likely increased the selling pressure on longer-dated contracts, the average difference between consecutive WTI futures contracts increased to 15 cents/b for the five trading days ending December 19, 2017.
The third quarter of 2017 represented the fourth consecutive quarter of year-over-year growth in capital expenditures and cash from operations for these 47 companies (Figure 4). Increased hedging will likely smooth revenue volatility for this set of companies, and the uptrends in capital expenditures and cash from operations for these companies supports EIA's forecast for U.S. crude oil production to reach more than 10 million b/d by the middle of 2018, averaging 0.8 million b/d more than 2017 levels. Fourth-quarter 2017 financial statements for these companies, which will outline how much more production the companies hedged compared with third-quarter 2017, will be released in February 2018. For similar financial analysis of oil companies, see EIA's recently released Quarterly Financial Review.
U.S. average regular gasoline and diesel prices fall
The U.S. average regular gasoline retail price fell 4 cents from the previous week to $2.45 per gallon on December 18, up 19 cents from the same time last year. The Gulf Coast price fell over five cents to $2.16 per gallon, the Midwest price fell five cents to $2.32 per gallon, the Rocky Mountain price fell nearly four cents to $2.48 per gallon, the East Coast price fell three cents to $2.44 per gallon, and the West Coast price fell one cent to $2.96 per gallon.
The U.S. average diesel fuel price fell 1 cent to $2.90 per gallon on December 18, 37 cents higher than a year ago. The Rocky Mountain price fell three cents to $2.96 per gallon, the West Coast price fell nearly two cents to $3.33 per gallon, the Midwest and Gulf Coast prices each fell one cent to $2.85 per gallon and $2.70 per gallon, respectively, and the East Coast price fell less than one cent, remaining at $2.90 per gallon.
Propane inventories decline
U.S. propane stocks decreased by 3.3 million barrels last week to 71.3 million barrels as of December 15, 2017, 7.1 million barrels (9.0%) lower than the five-year average inventory level for this same time of year. Gulf Coast inventories decreased by 1.9 million barrels, Midwest and East Coast inventories each decreased by 0.7 million barrels, and Rocky Mountain/West Coast inventories decreased slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 3.6% of total propane inventories.
Residential heating oil and propane prices increase, wholesale prices decrease
As of December 18, 2017, residential heating oil prices averaged $2.91 per gallon, nearly 3 cents per gallon more than last week and almost 34 cents per gallon higher than last year's price at this time. The average wholesale heating oil price for this week averaged $2.00 per gallon, 2 cents per gallon lower than last week but 26 cents per gallon higher than a year ago.
Residential propane prices averaged $2.49 per gallon, almost 1 cent per gallon more than last week and 30 cents per gallon higher than a year ago. Wholesale propane prices averaged $1.04 per gallon, almost 7 cents per gallon lower than last week but nearly 27 cents per gallon higher than last year's price.
For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.
Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 12/18/17 | Week | Year | |
| Gasoline | 2.450 | -0.035 | 0.186 |
| Diesel | 2.901 | -0.009 | 0.374 |
| Heating Oil | 2.908 | 0.028 | 0.338 |
| Propane | 2.489 | 0.007 | 0.301 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 12/15/17 | Week | Year | |
| Crude oil | 57.30 | -0.06 | 5.40 |
| Gasoline | 1.655 | -0.062 | 0.098 |
| Heating oil | 1.904 | -0.025 | 0.232 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 12/15/17 | Week | Year | |
| Crude oil | 436.5 | -6.5 | -49.0 |
| Gasoline | 227.8 | 1.2 | -1.0 |
| Distillate | 128.8 | 0.8 | -24.7 |
| Propane | 71.345 | -3.323 | -21.194 |