Strong oil prices have encouraged a tentative move back into derivatives markets by consumers looking to lock in costs for long-term supplies and avoid being burned if prices rise even higher, analysts and traders said.
Traders at banks dealing in swaps and other hedging instruments say customer business has improved markedly this month from a near-standstill since late last year.
The new business has mainly been end-user hedging - energy consumers fixing a price for future supplies - which picked up after spot futures prices reached record highs in early June.
"There has been a big increase in end-user interest even in the last three weeks or so...Mostly for 2006 onwards," said Tom James of Tokyo Mitsubishi International in London.
The emergence of end-user buying has quietly helped bring up the far end of the forward curve to around $30 per barrel, all the way out to 2010.
Forward prices have soared along with spot crude markets, reaching a peak on June 1, when NYMEX light crude futures for delivery in December 2010 settled at $30.11 a barrel. On that day NYMEX oil could not be bought anywhere along the six-year curve for less than $30.
Before prices really started to rocket in the last couple of months, high prices had actually been deterring hedging.
Consumers were worried about locking in a high price, and producers hung on in the hopes that prices might go higher.
Bank energy hedging business had declined by around 10 percent since last year, while crude oil business was down by as much as 50 percent, traders said.
But in the last few weeks open interest has soared on far-out futures, as consumers approach banks to help them hedge out some of the growing upside risk.
"Customer business up until about a month ago had disappeared, until they started to get panicky," said one trader.
NYMEX December 2010 open interest has more than doubled to nearly 16,000 lots since the middle of April. December 2009 open interest has also more than doubled.
Part of the surge in activity comes down to concern that oil prices could rise even higher - for example, in the event of a major conflagration in the Middle East - and so prices should be locked in now.
Steep discounts for forward supply against present purchases - known as backwardation - are also encouraging consumers to hedge now.
The backwardation reached a peak in mid-May when second-month futures cost nearly $12.50 per barrel more than the December delivery futures for three years out.
Since then, the new consumer buying has helped rein in backwardation to around $8 on the same spread.
"Now the forward curve shape is all down to the buyers. It's great for the producers, but not so great for the consumers," said William Buchanan of Standard Bank.
The increased business is a sign, but doesn't amount to all that much yet - the 2010 futures open interest equates to about 44,000 barrels per day on a rapidly growing oil market that already sucks up 80 million bpd.
"The bulk of buying interest is still waiting just outside the market," said one analyst at a bank with a big OTC business.
Producers have proved much more reluctant to jump back in to hedge supplies due to come onstream in years to come, even though with 2010 oil at $30 almost any sort of production project looks viable. Most majors are assuming $20-$21 for planning purposes.Some producers were stung by having sold some output forward at low levels in late 2001/early 2002, and lost out on the full benefits of oil's ferocious rally since then.
"The majority of producers think that we are going to see higher prices for quite some time now, so there is no need to hedge," said a trader.
While most energy firms have held off forward selling in the hope of even higher prices later on, traders do report a small increase in far-out hedging to lock in cash flow needed for finance agreements.
This signals that oil's sustained rise has started to manifest itself in less conservative boardroom planning - a shift that some analysts say will be needed to finance much-needed investment in oil production projects.
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