Oil ramping up hedges to stabilize and protect prices

Major oil producers, including Petroliam Nasional and Hess, have locked in hedges to protect against falling prices in the latest sign that markets are stabilizing after an extremely volatile year that drove traders from the commodity.

Petronas, as the Malaysian company is known, has been using put options as a way to counterbalance against declines in the market, which lowers prices for its oil.

The state producer has used a so-called put spread strategy that limits its gains in the event of a big slump, according to people familiar with the matter.

Hess scooped up U.S. crude options contracts for 75,000 barrels of oil per day at an average monthly floor price of $70 per barrel, the company said. The deal cost the company about $120 million in premium.

By contrast, Hess last year spent more than $300 million to unwind parts of its hedge, double the cost of entering the deal in the first place.

The return of hedging flows has significant consequences for the individual companies who are protected against big drops in prices, particularly as recession fears still linger.

It also means liquidity in the futures market is rising, particularly in months further along the curve, bolstering trading activity and leading to less volatile price swings.

There are also other signs that activity could increase: Exxon Mobil has said it’s creating a global trading division to compete more aggressively with the likes of BP and Shell in the world of energy derivatives.

Oil is trading in a narrow $10 range compared to late last year when it often fluctuated by more than $5 in a given session.

That stability underscores why more players are returning to the market.

Hess said last month it will keep increasing its hedging positions, a reversal from last year.

“We plan to increase our hedge position to a similar level as 2022 depending on market conditions,” John Rielly, chief financial officer of Hess, said on an earnings call on Jan. 25.

Between WTI and Brent combined, the company had about 150,000 barrels a day hedged last year.

Petronas has emerged as a consistent player in the oil hedging space over the past year, dipping strategically into the market to lock in protection against a sudden drop in prices.

While dealers familiar with the flows at Petronas said the company purchased a large volume of options earlier this year, it was not immediately clear how much production was covered by the contracts.

A representative for Petronas declined to comment.

Higher-producer hedging volumes show up in longerdated oil futures prices.

Over the last month, gains in nearby Brent futures have outpaced those for December 2023 and 2024 as producer selling depresses prices.

Lack of hedging flows had sapped activity in those fardated contracts previously but Hess plans to remain in the hedging market even as others have pulled back.