1Q 2020 Oil & Gas Market Update
- Global oil and gas markets experienced simultaneous supply side and demand side shocks during 1Q 2020.
- US shale E&Ps were particularly hard hit by this market dislocation.
- Our analysis of 8 oil focused producers highlights the crucial role of hedging in positioning those companies to weather the storm, and prosper in the future.
Hedge Accounting Change Creates Bonanza for Commodities
- With the advent of organized commodities markets, active trading created price volatility, and ultimately the desire to manage and mitigate commodity price risks.
- Historical hedging practices combined with an unfriendly US accounting framework resulted in decades of suboptimal commodities hedging practices and outcomes.
- A recent US accounting standards change provides numerous improvements, some of which are particularly favorable to commodities hedging.
- We expect these accounting changes will cause an increase in commodities hedging, and a shift in hedging practices that will improve outcomes.
Return of the Yield Curve
- The U.S. Federal Reserve has begun the process of normalizing interest rates following massive quantitative easing during the Great Recession.
- Achieving rate normalization is essential to bolster confidence in the economy and will reinstate a normal yield curve after a decade when it was flat.
- Currently on a path for three increases in 2017, the pace of rate hikes could accelerate if the effect of President Trump’s tax cuts and fiscal stimulus are felt before 2018.
- The Republican reform agenda contains multiple opportunities for Fed reform, which could alter or potentially derail the current path towards rate normalization.