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Shale Producers Hedge At Much Lower Prices

Midland

Shale oil producers are hedging again – this is the latest message coming from investment banks and analytical firms, according to Bloomberg. After hedging largely died down when WTI fell into a bearish market in June, now the risk-curbing activity is again on the rise. There is, however, a difference from the last hedging spree that took place after OPEC and Russia struck their output cut deal. Now, some E&Ps are hedging at prices as low as US$45 a barrel.

Last December, shale boomers rushed to lock-in higher prices for their future output encouraged by the quick rise in Brent and WTI on expectations that the cut deal would take care of the global glut. This didn’t happen, however, and prices have been declining relatively steadily since February. Over the last two weeks, though, crude has enjoyed a rally on the back of renewed hopes for the success of the OPEC deal as well as signs of a slowdown in U.S. production growth.

Bloomberg quotes BNP Paribas’ head of commodities strategy Harry Tchilinguirian as saying that the bank has seen a substantial increase in producers’ appetite for hedging after WTI climbed closer to US$50. Demand for put options—a common way to hedge against a future price slump—is surging, and forecasts for futures prices going forward form a flatter curve, he said.

A July survey by HIS Markit found that shale producers in the Permian have hedged about 65 percent of their oil output at an average strike price of US$50 a barrel. The survey involved 18 oil-weighted E&Ps active in the shale patch, of which 10 in the Permian.

This hedging, IHS noted in a press release about the report, will support their aggressive production targets for the rest of the year. Producers outside the Permian seem to be much less active in their hedging activities, with only 19 percent of their oil output hedged. It is telling that Permian-focused operators expected their output to rise by 25 percent this year, while non-Permian operators anticipate a 1 percent decline in oil and other hydrocarbon liquids production. In other words, it makes much more sense for Permian players to hedge more of their future output.

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HIS also reported that for next year, Permian operators have hedged 25 percent of their output that year at an average of US$51 a barrel. That’s pretty good compared to what strike prices some producers are setting now. Bloomberg reports that there were several large hedges last week, one of which involved 4 million barrels of future oil production hedged at US$45 a barrel.

Earlier this week, Pioneer Natural Resources said it had hedged an output amount equivalent to a daily production rate of 97,000 barrels at US$48.71 a barrel for 2018. This, Bloomberg notes, compares to US$50.11 per barrel in a May hedge of the equivalent of 46,000 bpd in oil output.

All this suggests that shale producers are once again careful with their future profits, or at least the avoidance of losses. After the initial enthusiasm about growing production, now wariness is settling in. This wariness could prove a life saver if prices continue to fall, which they likely will, with the upward potential limited by the downward trend in strike prices chosen by the hedgers.

By Irina Slav for Oilprice.com

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  • Me on August 07 2017 said:
    The banksters own these zombies...hence the hedging. Shorting the product they sell, while destroying value with the drill bit. Geniuses, give'em another raise and some more stock.

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