Good morning; here's what the Oilman has for you today:

• Market Gets Schooled on Oil Supply Fragility

• Drop In U.S. Oil Hedging Comes to Bite

• Tweet of the Day

Market Gets Schooled on Oil Supply Fragility

Oil prices have been on the rise for three days now after Iraq took 400,000 bpd in supply off markets.

The news is a stark reminder that global oil supply remains tight and extremely sensitive to disruptions.

Just when everyone thought recession fears will keep oil depressed…

What’s going on in Iraq?

The Iraqi government has been fighting the government of the semi-autonomous northern region of Kurdistan for control over the region’s oil riches, which are plentiful and flow to international markets via Turkey.

The latest flare-up was caused by a court ruling that said Turkey had no right to accept Kurdistan oil without the approval of the central Iraqi government.

Iraq turned the tap off the pipeline that carried Kurdish oil to Turkey.

It also told Kurdistan it should give up plans for control over the oil and hand it over to Baghdad.

Kurdistan is resisting. Negotiations are ongoing. Oil is climbing higher.

Why would a measly 400,000 matter at all?

Because of what analysts have been saying for months:

• Supply is tight

• It will continue to be tight for the observable future

• And oil’s going higher

The market was lulled into a false sense of security when Russia said it would cut production by half a million barrels daily. The announcement had virtually no effect on prices, but that’s because it had no effect on exports.

Iraqi supply is not secure, and the pipeline shutdown had an immediate effect on exports. It’s also having an effect on production.

This is not the first time Baghdad has locked horns with the Kurdish government, and it always pushes oil higher. Think Libya and its output outages.

The world doesn’t have enough oil.

It’s teetering on the brink of a shortage that could come sooner than many believe.

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Drop in U.S. Oil Hedging Comes to Bite

U.S. shale drillers have only hedged 27% of their production for this year, leaving themselves exposed to unfavorable oil price fluctuations.

The hedged portion of output is down from 40% last year when oil soared, and shale drillers missed out on billions in profits.

Gambling may be bad for your bottom line, but it feels so good

After Russia’s invasion of the Ukraine, oil prices flew sky-high, and everything pointed to a continued rally.

Not only did global oil supply become less secure with all the sanctions dumped on Russia but OPEC+ stubbornly refused to boost production in response to that security compromise.

Demand, meanwhile, continued rising, keeping prices high. By the time they started weakening, shale producers were convinced they could make more money this year if they didn’t lock in a fixed price.

Sometimes you win. Sometimes you lose.

Hedging future production is a high-risk business, but it’s also a high-reward business if you get lucky and prices fall. And shale producers weren’t lucky last year.

The jury’s still out if they’ll get lucky this year.

Well, they did get lucky last year because they did make record profits on the rally – no one is mad enough to hedge all production.

But now, with prices a lot weaker than they were a year ago, the lack of hedged output may force some to revise production plans.

Of course, the year is not even halfway over, so there’s plenty of time for a price rebound, and many predict it.

The thing is, you never know how long it will last…and how bad the next price drop would be.

Around the Global Patch

🇳🇴 Shutdown: Norway-based producer of 25% of Kurdistan's crude oil
🌏 Cheap, abundant oil fuels new Asian growth.
🇩🇪 Neptune Energy begins $23MM P&A projects.

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