Oil Rally: Prices for 2019 Matter More for Crude's Outlook

(Bloomberg Gadfly) -- Explosions over Riyadh and expected explosions in Syria appear to be having the expected effect on oil prices:

Oil Rally: Prices for 2019 Matter More for Crude's Outlook

West Texas Intermediate crude oil jumped above $67 a barrel on Wednesday morning, reaching its highest level since December 2014.

Meanwhile, another, less obvious, marker nudged above $60. That's the price of WTI swaps for 2019, now trading at their highest level since summer 2015:

Oil Rally: Prices for 2019 Matter More for Crude's Outlook

These matter because they are the basis for hedging by U.S. exploration and production companies, allowing them to lock in higher prices for future production. For many of these firms, $60 a barrel is akin to saying frack, baby, frack.

Less than 10 percent of expected oil production in 2019 is hedged so far, according to a Goldman Sachs report published last month. As I wrote here, producers in the prolific Permian basin are facing challenges in getting their oil to market, resulting in some barrels being priced at discounts. There is also more pressure these days to live within cash flow and prioritize returns over sheer production growth, as evidenced by an upturn in shareholder activism.

Few things relieve such pressure, however, quite like a geopolitical premium creeping back into oil prices. Actual disruptions to supply are far more likely to materialize in places like the Middle East or Venezuela than in Texas, where such fears feed straight into the bottom line. While hedge funds delight in that jump in near-month oil futures, expect producers to focus on those 2019 contracts -- and start laying the foundations for higher output.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

To contact the author of this story: Liam Denning in New York at ldenning1@bloomberg.net.

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