Hedging Oil & Gas Production and Shifting Market Dynamics

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A couple of days ago, our CEO returned from the S&P Global Platts 4th annual crude oil summit that was held in Dubai, in which he spoke about the importance of hedging production by oil & gas producers (link).

The summit was attended by different players covering the entire spectrum of the oil & gas industry in addition to bankers and even sovereign wealth funds, both from the region and beyond.

You may be surprised about the topic that our CEO chose to talk about in that summit but the fact is that the absolute majority of producers in that region do not hedge their production at all! Imagine that!

A country like Saudi Arabia, which produces in excess of 10 million barrels of oil per day and exports at least 75% of its production does not hedge its production and rather leaves its oil-dependent national budget under the mercy of oil’s huge price swings!

By a simple calculation that our CEO shared with the attendees, he showed them how the drop in oil prices from the June 2014 high to the February 2016 low cost each unhedged producer an average of $28.7 billion for every one million barrel of oil produced per day over that period.

So, for a country like Saudi Arabia, if we only take into consideration the exported quantity (not its entire production), that country lost over $215 billion of revenues over that period, causing the country to run budget deficits for the past two years! And that is one of many countries whose economies are heavily dependent on oil exports, yet they do not do hedging at all!

Back to the markets now… This week will be a very interesting one, as we expect a clear shift in dynamics for the majority of markets to commence this week according to our Future Sentiment Indicator. Could that shift be triggered by this week’s Fed meeting / rate decision? It won’t take long before you find out!