Oil producers aren’t betting on the rally.
After surviving two years of low prices, they’re gearing up for a third by buying protection against a renewed downturn. Laredo Petroleum Inc. said July 14 that it hedged more than 2 million barrels of 2017 output earlier this month. Drillers have increased bets on falling prices by 29 percent this year.
Crude has declined more than 10 percent since hitting a 2016 peak in early June, stoking fears of another second-half slump. It was July that broke the back of last year’s bull-run, with oil plummeting 21 percent. The prospect of a repeat has drillers doing everything they can to raise cash, from selling stocks and bonds to adding fresh hedges.
“The producers have sold the hell out of this rally,” said Stephen Schork, president of Schork Group Inc., a consulting firm in Villanova, Pennsylvania. “The companies that did survive, they’ve been hedging into this rally. And they’re counting their blessings.”
Hedging has become a critical cash lifeline for companies that have so far survived a bust that has claimed dozens of their competitors. Since the start of 2015, 85 North American oil and gas producers have gone bankrupt, according to law firm Haynes & Boone LLP.
Producers increased bets on falling prices for a third consecutive week in the seven days ended July 12, according to data from the Commodity Futures Trading Commission. Short wagers rose by 8,566 futures and options combined, or 1.6 percent.
Drillers are also taking advantage of the rally to tap the capital markets. U.S. oil and gas producers have been selling shares at record speed, using the cash to repay debt or buy oil and gas prospects, bolstering the asset side of the balance sheet. So far this year, companies have raised more than $16 billion in equity, according to data compiled by Bloomberg.
“They’re trying to generate cash to stay alive and fight another day,” said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. “The producers know full well that the oil market is not out of the woods yet.”
If this year is anything like the last two, producers may be grateful they shored up their finances. Oil dropped 38 percent in the second half of 2015 and 49 percent in 2014. There are already signs that a gasoline supply glut may back up into the crude markets, damping demand.