In a surprise move pulled off late last year, it has been revealed that U.S. drillers hedged their bets last year against falling oil prices, which is likely to add more pressure to the oil price and push the OPEC cartel into more production cuts.
A report by consultancy group Wood Mackenzie showed that American firms rushed to lock in higher prices when oil was trading significantly higher last year which seems to have turned out to be a a clever move.
The practice of Hedging oil protects buyers against falling prices as they are able to lock in a price to at the time of the agreement (in the case of US drillers when the prices were much higher last year) and then sell to the market at the agreed price.
A major stumbling block for OPEC in the quest for further production cuts is Non OPEC member Russia, who have so far reneged on the last deal by only agreeing to cut half of the oil supplies they signed up for.
If they don’t jump on board with the new agreement other countries are expected to follow suite meaning the deal will fall apart and the oil price is likely to tumble further.
However, if they do come to the party and agree to further cuts and stick with their promises we could see a substantial lift in the oil price and a new bottom for the foreseeable future,
“The onus is now on Russia to show they’re serious about this, If Russia come to the fold with non-Opec, we’re going to see a floor around $60 a barrel.” noted Mercuria chief executive Marco Dunand.