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Vladimir Zernov
Crude Oil

Oil Video 23.07.20.

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Russia Wants To Use Hedging To Protect Itself From Oil Price Downside

Vladimir Putin’s spokesman Dmitry Peskov has recently confirmed that the Russian President ordered an evaluation of the use of hedging for oil and gas revenues, similar to the mechanism used by Mexico.

The idea is to use put options to protect Russia from oil price downside. Currently, Russia uses a so-called “budget rule” which redirects all budget revenues from oil prices in excess of $42.4 per barrel to the National Wealth Fund.

The money in the National Wealth Fund serves as reserves that could be used at dire times or to fund ambitious investment projects.

Hedging is widely used by smaller oil producers like U.S. shale oil companies. However, the use of hedging by Russia, which produced more than 11 million barrels per day (bpd) before the OPEC+ deal was implemented, would be a major development for the oil market.

It won’t be easy to realize this idea in practice since an oil producer must do its best to hide its hedging strategy or speculators will take advantage of such its hedging program. For Russia, which is a top-3 oil producer, this may be an impossible task.

Anyway, the existence of the hedging idea reveals Russia’s rather bearish outlook for oil prices. Earlier, we have seen oil majors cut their long-term oil price forecasts, and now it looks like Russia shares their views.

Will U.S. Oil Demand Continue To Rebound?

Yesterday, WTI oil price momentum was hurt by the release of the new inventory data which showed that crude oil inventories increased by 4.9 million barrels. Another worrisome development was the increase in U.S. domestic oil production to 11.1 million bpd.

The key concern right now is whether the U.S. oil demand will continue to gradually recover amid the problems on the coronavirus front.

In recent days, media attention has shifted to Trump’s attempts to stop protests in the U.S. and the worsening U.S – China relations, but coronavirus has not disappeared, and the new restrictions which were imposed in some states may be hurting oil demand.

We won’t know the exact answer until the next inventory report. In my opinion, the oil market will not be able to tolerate a second inventory increase in a row at a time when inventories should be on their way down, and a sell-off may follow in this case.

In the opposite scenario, a healthy inventory draw will surely provide support to the oil market.

For a look at all of today’s economic events, check out our economic calendar.

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