Hedging is about to make a comeback on global crude oil markets


Global airlines and shipping companies are expected to flock back into oil hedging in a low but rising crude oil pricing environment, Citigroup says.

Oil consumers are returning to hedging as spot oil prices have rallied and futures curves have flattened out, pointing to further strength ahead, Citi analysts said in a note.

Citi’s comments come as oil prices have recovered from a plunge in 2014 with the bank seeing the first stop for the rally at about US$65 a barrel, around 25% more than current price levels.

Besides spot prices, “Another major factor that could encourage consumer hedging is the shape of futures curves,” the analysts said. “As term structure strengthens and perhaps even inverts, the psychological impact of locking in future fuel prices below near-dated and spot prices should also embolden consumer hedging.”

Consumers have been slow off the blocks after having been burnt the last time around when they locked in prices at around US$80 a barrel in 2014, a level that crude hasn’t even been within sniffing distance of since. Further fears of the return of US shale producers has capped some activity, Citi said.

The count of active oil rigs in the US for the fourth straight week last week and is more than 80% higher than the low reached in May 2016. The tally is at its highest level since the week of October 23, 2015, according to Baker Hughes.

Increase in US production now threatens to undermine efforts by the Organisation of Petroleum Exporting Countries (OPEC) and some non-members to reduce the global oversupply of oil.

Howevere, the outlook for oil prices is being helped some “wildcard factors” such as the Trump tax reform plans. The proposal includes the potential for the border tax adjustment, which, if implemented in the oil sector without exemptions, would raise oil prices for US consumers relative to global consumers.

“Global airline and other consumer sectors are seeing more hedging activity though, with Singapore Airlines embracing longer-term hedge,” the analysts said. “Shipping, food, beverages, and retail sectors have also been active.”

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