Report: Permian producers hedging bets in fear of pipeline shortages

Oil drillers increased their hedges on Permian Basin oil prices beyond 2019 by 431% during Q2 in order to lock in healthier prices in case planned pipeline projects fail to come online in time, according to a new report from energy research firm Wood Mackenzie. The huge jump represents unusually high trading for 2020 commodity pricing, and “the only reasonable conclusion one can draw from this surge is that Permian producers are concerned that key pipeline projects won’t be completed on schedule,” says WoodMac research analyst Andrew McConn.

Permian production has surged from 2.5M bbl/day last year to 3.4M bbl/day currently, resulting in Permian oil selling at a nearly $15/bbl discount vs. the U.S. benchmark in the Cushing, Okla., storage hub.

WoodMac also notes concern of an overcorrection, with too many new pipelines coming online by the end of 2020 and leaving some pipelines unable to move oil near their full capacities.