NEW YORK (Reuters) – Oil producers in Canada have jumped on an opportunity to lock in revenues for 2019 and 2020 as average crude futures for those years have soared over 20 percent to their highest levels this year, sources familiar with the deals said.
Brazil’s state-run oil giant Petróleo Brasileiro SA was also executing a part of its annual oil hedge last week, dealers and banking sources said.
Canadian oil is priced against U.S. crude futures, and producers use a combination of the benchmark futures and other financial tools to protect against fluctuations in prices.
Average U.S. crude prices for the rest of 2019 and 2020 hit their highest in four months, with 2019 prices reaching a high of $60.34 a barrel on Tuesday.
After crashing more than 40 percent in the fourth quarter, oil prices have rallied after the Organization of the Petroleum Exporting Countries and its allies began to curb supplies since the start of the year. Falling output from Iran and Venezuela because of U.S. sanctions have also supported the market. [O/R]
Last week, there was a massive spike in activity in crude swaps, one of the most popular tools used for hedging.
About 17 million barrels changed hands in a single day, brokers said, one of the busiest in memory, according to one banking source. About 92 percent of those volumes were seen in U.S. crude, with activity slightly greater in calendar-year strips for 2020 than 2019.
Strips are contracts that average futures prices for all monthly contracts for that year.
Canadian producers – such as Cenovus Energy Inc and MEG Energy Corp – have faced sharp volatility in regional oil prices over the past year. Canadian crude’s discount to the benchmark slumped to their widest on record after oil was stranded due congestion on pipelines, leading to Alberta’s provincial government’s temporary oil production cuts earlier this year.
It was not immediately clear which Canadian companies were hedging, but they are putting on hedges incrementally, a cautious approach “given recent memory of how quickly the market can unravel,” one banking source said.
Earlier this month, MEG Energy said it would add to its hedge book in coming days.
“Given where prices are and we’re seeing the strip for 2019, and frankly, into 2020, we’ll continue to layer on opportunistically further hedges to protect the cash build and the cash balance,” Chief Financial Officer Eric Toews said during an earnings call.
Petrobras, meanwhile, used option contracts in Brent crude for their hedging, because it helps put a floor under prices for the oil it will produce this year.
“They (Petrobras) came in beginning of the week and did about 20,000-30,000 Brent $60 puts (options), buying through banks,” one broker said.
Another source said Petrobras traded in two clips, for a total of about 50,000 lots.
Petrobras declined to comment.
Trading in spreads – or the difference between oil contracts for delivery in different months – has also climbed, as producers locked in prices for 2020.
Producer selling in 2020 pushed the price premium for both U.S. and Brent crude for delivery in December 2019 to more than $2 a barrel above futures for delivery in December 2020.
The time spread, a popular trade in oil markets, was at the widest since early November on Tuesday while volumes last week hit the highest since late January.
Reporting by Devika Krishna Kumar in New York; Additional reporting by Gram Slattery in Rio de Janeiro and Nia Williams in Calgary; Editing by Marguerita Choy