Tyler Durden: One week ago when Morgan Stanley was lamenting the relentless buying by algos (or as he called them “macros” and saying “forgive the macros – they know not what they do”) who have taken over the function of setting the price of oil despite “increasingly bearish fundamentals”, the bank’s analyst Adam Longson asked one question: will the summer of 2016 be a rerun of last summer when oil jumped from $45 to $60 only to tumble into the end of the year.
We don’t know the answer, although at least for now it certainly appears that much of the euphoria that had gripped the oil market last year has returned with a vengeance, even if for the time being $45 appears to be the new $60.
However, what we do know is that what may have been the primary catalyst behind last year’s eventual drop in oil prices is back: hedging.
This is what Reuters writes in an article from earlier today:
U.S. oil producers pounced on this month’s 20 percent rally in crude futures to the highest level since November, locking in better prices for their oil by selling future output and securing an additional lifeline for the years-long downturn. The flurry of dealing kicked off when prices pierced $45 per barrel earlier in April. It picked up in recent weeks, allowing producers to continue to pump crude even if prices crash anew.
While it was not clear if oil prices will remain at current levels, it may also be a sign producers are preparing to add rigs and ramp up output.
“U.S. producers have been quick to lock in price protection as the market rallies given that the vast number of companies remain significantly under hedged relative to historically normal levels,” said Michael Tran, director of energy strategy at RBC Capital Markets in New York.