Insights

Insights

Insights

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.