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U.S. Shale Races To Hedge Production Amid OPEC+ Uncertainty

U.S. shale producers started boosting this week hedges to lock in the price of oil they plan to pump in the coming months, after the OPEC+ drama left the market uncertain about the future of oil prices and the alliance itself, Bloomberg reported on Wednesday, quoting sources with knowledge of the rise in hedge trades.  

Typically, the U.S. shale patch is hedging a part of its future oil production at a certain oil price. In this way, producers are protecting themselves against sharp drops in market benchmarks and ensure revenues for their crude at the locked-in price. The downside of hedging too much production is that companies miss out on additional revenues if oil prices are higher than expected.

The market crash of last year is still a fresh wound in the shale industry, so companies are now hedging against another potential oil price war if the United Arab Emirates (UAE) and Saudi Arabia fail to find common ground on the Emirati insistence that any deal about future oil supply from OPEC+ should include a revision of the UAE’s baseline production level.

Meanwhile, U.S. shale producers continue to stick to disciplined spending and haven’t shown any signs they would be rushing to break that discipline, despite the recent rally in oil prices which has kept WTI Crude prices at above $70 per barrel for the past month.

Last year, U.S. producers hedged production at lower prices than the actual price of oil in early 2020, which led to estimated accumulated missed opportunity losses of as much as $7 billion for the first quarter of the year, according to data from Enverus.

Last year, the shale patch hedged production for 2021 an average of $42 per barrel of crude.

But oil prices have rallied by more than 40 percent since the start of this year. The U.S. benchmark hit a six-year high at above $76 earlier this week after OPEC+ called off its meeting set to decide supply strategy for the coming months.

By Tsvetana Paraskova for Oilprice.com

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