- Shale firms that actively hedged sit out oil price gains
- Still higher oil prices could hurt firms that hedge
- Lack of OPEC+ deal on curbs fails to stir shale
NEW YORK, July 7 (Reuters) – U.S. shale producers promised investors they would keep a tight rein on spending in 2021, and the restraint on drilling has extended to their hedging strategies even as crude prices surged due to disarray among OPEC and allied producing countries.
Oil demand is rebounding from demand destruction during the pandemic, but output has not kept up, boosting prices. Crude futures , are above $73 a barrel, near three-year-highs, and some analysts believe oil could hit $100. In the past, shale firms boosted output and added to hedges as oil rallied, eager to lock in profits.
Oil companies use hedging to guard against sudden price downturns. By buying or selling later-dated futures and options contracts, they guarantee a particular sale price at a later date. However, the swiftness of the post-pandemic rally has caused U.S. shale companies to back off from hedging after a flurry of activity in early June.
U.S. shale executives told Reuters they are maintaining the same wait-and-see attitude towards hedging that they are towards increasing output.
“With every bank saying that oil will be at $90-$100, no one is going to put hedges on right now,” said an executive at a shale oil producer, who agreed to speak on the condition of anonymity.
The Organization of the Petroleum Exporting Countries and allies, known as OPEC+, have not reached agreement on returning supply to the market. This has raised concerns of tighter supply that could boost prices, but others fear some producers might rapidly boost output which could ultimately pressure prices.
When producers hedge aggressively, they cap profits if prices rally further and increase their costs due to expensive buying of derivatives.
Some 53 oil producers tracked by consultancy Wood Mackenzie have hedged about 32% of expected 2021 production volumes, less than the same time a year ago. That group currently has combined losses of $3.2 billion in the first quarter on hedge contracts, WoodMac said.
Hedging programs are expensive, analysts said, and producers said investors would rather see them boost production at higher prices than take a chance on additional hedging.
Where producers are hedging more, they are locking in profits for 2022 output, brokers said. As U.S. oil prices climbed above $70 in June, some shale producers added to their hedges.
Short positions among producers, a sign of hedging, climbed to the highest since 2007 by mid-June, according to data from the U.S. Commodity Futures Trading Commission (CFTC), . That category also includes positions held by commodity merchants and the data can be distorted, dealers said.
Those positions have declined. WoodMac said producers were more likely to keep remaining 2021 production unhedged and sell at current prices instead, focusing hedges on 2022. Companies are only about 9% hedged for 2022.
Hedging provides a way for producers to avoid risk, but “that is not what shareholders want,” said oil analyst Paul Sankey. Investors who are putting money into producers want exposure to higher oil prices, he said.
Shale firms have pledged to keep production flat, boosting investor returns rather than pumping more crude. U.S. oil production peaked near 13 million bpd in late 2019, and then fell sharply as COVID-19 took hold. Output rebounded to about 11 million in mid-2020, but has stagnated since.
Oil futures charts currently show a phenomenon called backwardation, with prices for immediate deliveries higher than for contracts in the future. This deters shale producers from boosting hedging, because they can make more money from selling oil now, market sources said.
Prices for U.S. crude for delivery in December 2021 traded more than $7 above oil for delivery in December 2022 on Tuesday , highest on record.