NEW YORK/CALGARY (Reuters) - Canadian oil producers are rushing to hedge future production, market sources said on Tuesday, taking advantage of an eight-month high in crude prices and a weak Canadian dollar to lock in production for 2018 and beyond.
Producers in Canada are still reeling from a three-year downturn in oil prices, and hedging at current levels will protect the best margins they have seen since April.
That is a welcome respite for the industry as some global oil majors have left Canada for cheaper energy producing regions.
Benchmark U.S. crude prices hovered just under $55 a barrel on Tuesday, and the Canadian dollar <CAD/> neared a three-month low of C$1.2892 against the U.S. dollar. A weak Canadian dollar is a boon for producers north of the border who pay costs in Canadian dollars but sell their crude for greenbacks.
“The rally has provided producers with a lifeline and visibility to lock in price protection at economical levels,” said Michael Tran, director of global energy strategy at RBC Capital Markets.
“Canadian producers have been particularly active given that the recent weakness in the Canadian dollar means that producers can lock in attractive levels approaching C$70/bbl.”
Canadian oil sands producers were inquiring about and placing new hedges for next year, according to four market sources familiar with money flows.
They also started asking for quotes for hedges in 2019, three sources added.
Calgary-based MEG Energy is “actively looking” for additional opportunities to hedge production at $50-plus a barrel, Chief Executive Bill McCaffrey told analysts on an earnings call last week.
The volume of hedging was pressuring prices for oil futures further out, traders said. The front-month U.S. benchmark contract settled 23 cents higher on Tuesday, while the contract for crude for December 2018 fell 4 cents.
The forward curve for the more illiquid heavy Canadian crude also fell.
Western Canada Select (WCS) heavy blend crude for 2018 was bid at $15.75 a barrel below U.S. crude on Tuesday, according to Shorcan Energy brokers, having settled at a discount of $15.05 per barrel under U.S. crude on Monday.
Reporting by Catherine Ngai in New York and Nia Williams in Calgary; Editing by Simon Webb and Richard Chang