US shale groups lock in revenues as output nears Saudi and Russian levels

A gas flare burns at a fracking site in rural Bradford County, Pennsylvania. (Reuters)
Updated 13 September 2018
0

US shale groups lock in revenues as output nears Saudi and Russian levels

  • Hedging activity picks up pace
  • Swaps increased last week

NEW YORK: US shale producers are locking in prices for their production as much as three years into the future in a sign that strong domestic crude pricing is nearing a peak, according to market sources familiar with money flows.
US crude prices for 2019 and 2020, based on an average of each year’s monthly contracts, have climbed this week above $68 and $64 a barrel, respectively, the highest levels in over three years. The rally comes even as front-month prices have dropped from the three and a half year highs touched during the summer.
“Hedging activity has picked up considerably over recent weeks and this will continue to be the case as producers begin to frame budgets for next year,” said Michael Tran, commodity strategist at RBC Capital Markets, noting the rally in forward prices are encouraging the producer bets.
Hedging can reduce risks associated with volatility in oil prices, acting as an insurance contract to lock in a future selling price and fix spending plans. Such longer-term bets signal US producers will continue to expand output, keeping a lid on prices, according to crude traders and brokers.
The nation’s output this year has climbed above 10 million barrels per day (bpd), close to top producers Russia and Saudi Arabia. That output is forecast to grow next year by 840,000 bpd to average 11.5 million bpd.
There was a large uptick in crude swap activity last week, with just shy of 8 million barrels changing hands in a day, an energy derivatives broker said, signaling strong hedging interest. Swaps are a type of contract that allow producers to lock in or fix the price they receive for their oil production.
Almost 80 percent of the swap activity was split evenly between calendars 2020 and 2019, and the remaining 20 percent for this year, the broker said, adding that there was a small amount of calendar 2021 activity during the week.
The market sources declined to say which oil companies were actively hedging in recent weeks.
The move to hedge at these levels could prove risky for producers in a market where the price of oil for immediate delivery is higher than for later deliveries.
Many US shale producers hedged second-quarter production at about $55 a barrel, which backfired as US crude climbed to more than $70 a barrel last quarter, the highest level since 2014.
As a result, producers are using more “collars,” a financial instrument that provides price protection on the downside while allowing them to share in some of the upside if prices rally.
“We’ve been building a lot of collar structures,” Christian Kendall, chief executive of Denbury Resources Inc. said last week, noting that the instruments will protect its production at about $60 a barrel and provide upside if oil rises to the high $70s per barrel.
Denbury is nearly 50 percent hedged for 2019 and will add hedges to get to 60 percent to 70 percent of production, Kendall said.


Jubail petrochemical complex could lead to homegrown car industry

Updated 27 June 2019
0

Jubail petrochemical complex could lead to homegrown car industry

  • Advanced Petrochemical said it signed a memorandum of understanding with SK Gas to build a propane dehydrogenation and polypropylene complex
  • The project is expected to produce high value plastics grades for the automotive industry as well as other specialized grades that are currently being imported into Saudi Arabia

LONDON: Advanced Petrochemical and South Korean SK Gas plan to develop a $1.8bn petrochemical complex in Jubail that could help plans to develop a homegrown car industry in Saudi Arabia.
It comes amid increased economic cooperation between Riyadh and Seoul following an $8.3 billion economic co-operation pact struck this week during the first visit of Saudi Crown Prince Mohammed bin Salman to South Korea.
The Saudi petchem producer said it signed a memorandum of understanding with SK Gas to build a propane dehydrogenation and polypropylene complex. The project is expected to produce “high value plastics grades for the automotive industry” as well as other specialized grades that are currently being imported into Saudi Arabia, Advanced Petrochemical said in a filing to the Tadawul stock exchange on Wednesday.

 

Separately the company said it has received propane feedstock allocation from the Kingdom’s Ministry of Energy, Industry and Mineral Resources for the project, which is slated to start in 2024.
Advanced Petrochemical also disclosed in a third filing that it was conducting a feasibility study for a cracker project in the Kingdom.
These latest deals reflect twin objectives to develop high-value manufacturing in the Kingdom to create jobs while also investing heavily in the petrochemicals sector to capitalize on rising global demand for high value plastics.
Saudi Arabia is the largest new automotive sales and auto parts market in the Middle East, accounting for an estimated 40 percent of all vehicles sold in the region, according to the US export.gov website.The addition of potentially as many as 3 million women drivers to the roads is expected to further spur domestic demand.
Saudi companies, spearheaded by Saudi Aramco, are investing billions of dollars in petrochemical projects worldwide to meet rising global demand. Petrochemicals are set to account for more than a third of the growth in world oil demand to 2030, and nearly half the growth to 2050, adding nearly 7 million barrels of oil a day by then, according to the International Energy Agency (IEA).
Demand for plastics — the key driver for the petchem industry — has outpaced all other bulk materials (such as steel, aluminum, or cement), nearly doubling since 2000, the IEA estimates.

FACTOID

40% - Saudi Arabia is the largest new automotive sales and auto parts market in the Middle East, accounting for an estimated 40 percent of all vehicles sold in the region.