- By hedging against the volatility in prices, producers are limiting how far oil prices can rise, according to Morgan Stanley's Adam Longson, saying "rampant" hedging among oil producers will probably cap WTI at ~$49/bbl.
- "The CFTC producer short position reached new highs after the [January] lows, partly from distressed producers being forced to hedge. However, this latest uptick has not been confined to distressed producers. In our conversations, we are seeing healthy appetite from mid and large cap Permian producers as well," Longson writes.
- The takeaway, according to Business Insider's Akin Oyedele, is that with so much production hedged at ~$40/bbl, producers are incentivized to sell and produce oil so long as it remains below their prevailing hedges.
- Despite strength from short covering, producer hedging is limiting the rally in deferred prices, and bloated U.S. inventories will continue to rise, which suggests a contango must remain, thus "the back will cap the front," according to Longson, who sees WTI trading in a $25-$45 range.
- ETFs: USO, OIL, UCO, UWTI, SCO, BNO, DWTI, DBO, DTO, USL, DNO, OLO, SZO, OLEM