Baytex Energy Corp T.BTE

O&G investors - understanding the forward strip

[BayStreetWolfTO]

I have read people talk about forward hedging that seemed to misunderstand the concept I thought I would post something for those who may not understand. 

I have read many people say (not just BTE) I hope my Cdn O&G company hedges 2023 over $100 oil.

First off this wasn't even a possibility. 

The current "spot" price is above the future price.

For instance here is the chart from March when WTI was $115...you will see at that time forward contract into 2023 were only $88. So a company even at that time had zero chance of hedging even close to $100.

Second you will see a chart as the contract month goes out in time the chart(price) declines. This is called backwardation...when there is a greater near term demand. This is what you want to see

BUT there is no such thing as hedge 2023 above $100 when oil was $115 etc.

Hope this helps...

March 6th 2022


Curve from May 6th 2022

[dllscwbysfn]

I am not so sure you are right on this one. Hedging is an agreement between 2 parties. They may or may not use the forward strip. It might provide a guideline for both parties but it's not the law. Hedging for me is gambling for both sides of the agreement. Both sides want to be right. 

[jleer42]

While there is much gambling/speculating in the futures/derivitives markets, this is really insurance that operating costs will be covered.  In backwardation, by definition, future prices are less than the spot price, you may have some wiggle room on your hedges but you will hedge for less than the current spot price.

[dllscwbysfn]

Insurance for both sides of the deal(hedge). No one can force anyone to buy a hedge or sell a hedge. If a company doen't like the hedge price they can simply not hedge, this holds true for both the buyer and the seller.   When oil crashed did companies hedge their future production at $10WTI or $20WTI?

[masfortuna]

Not exactly.  Companies were forced to hedge by banking institutions PRIOR to these banks extending/renewing their credit.  The banks hedged their loan buy forcing oil companies to hedge at whatever number they could get. To add insult to injury, the lending rates given to the oil companies were at a premium to reflect the risk attached. Case in point "ATH". And that's the

[dllscwbysfn]