Oil producers are not betting on the recent price rally. In contrast, after surviving two years of low prices, they are gearing up for a third by buying protection against a renewed downturn.
Crude has declined more than 10% 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%, Bloomberg reported. 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 have been hedging into this rally. And they are 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 last year, 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.
Drillers are also taking advantage of the rally to tap the capital markets. US 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 are 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% in the second half of 2015 and 49% in 2014.
There are already signs that a gasoline supply glut may back up into the crude markets, damping demand.
