U.S. shale producers lock in future sales as oil prices rise to one-year
high
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[January 15, 2021] By
Devika Krishna Kumar and Jennifer Hiller
NEW YORK/HOUSTON (Reuters) - U.S. shale
producers are taking advantage of the oil market's rally to levels not
seen in nearly a year by locking in prices for future sales, sources
familiar with the matter said.
U.S. crude futures this month jumped above $50 a barrel to the highest
since February. The rally has sparked optimism among shale companies,
but after a bracing year of pandemic-induced demand destruction, they
are not ready to ramp up production. Instead, they are using futures
markets to lock in higher sale prices.
Shale producers buy and sell contracts in the futures and options
markets in a process known as hedging to secure cash flows for
later-dated sales.
U.S. oil production peaked at nearly 13 million barrels per day in late
2019, but is now around 11 million bpd after the coronavirus lockdowns
crushed fuel demand and oil prices. Output is not expected to rise much
in 2021, but those that hedged now are guaranteed sales of barrels at
more than $50 even if prices drop again.
"There's a lot of hedging going on," said Chris Wright, chief executive
of Liberty Oilfield Services, the second-biggest fracking company in
North America. "At the prices available today, producers with good
acreage can do pretty well."
Producers' short positions in U.S. crude futures and options, an
indication of hedging activity, have been rising since autumn. They hit
a five-month high in mid-December, according to the U.S. Commodity
Futures Trading Commission. [CFTC/]
In 2020, 46 North American exploration and production companies declared
bankruptcy, according to energy law firm Haynes and Boone, while others
merged to reduce debt. Investors had already been pressuring shale
companies to curb spending and boost returns even before the pandemic.
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A sticker reads crude oil on the side of a storage tank in the
Permian Basin in Mentone, Loving County, Texas, U.S. November 22,
2019. REUTERS/Angus Mordant
"Producers locked in a certain amount of wells at a certain price and hedging at
$50 makes you look like a rockstar. This year will be about free cash flow," one
executive at a U.S. shale producer said, on condition of anonymity.
Producers that are hedging are likely locking in about 15% to 20% of production
at a time, said Tom Petrie, chairman at energy investment bank Petrie Partners.
Some companies are holding off because they anticipate prices to rise further,
perhaps to $60 or $65. Global benchmark Brent crude, which also hit 11-month
highs this week near $57, could rise to $65 per barrel by summer 2021, Goldman
Sachs said this week.
"Some of them (producers) are pretty torn between hedging at a level they would
have killed for six months ago and their perpetually optimistic nature," said
Steve Sinos, vice president at consultancy Mercatus Energy, which advises
corporations on hedging.
Average 2021 U.S. crude prices have climbed above $52, also their highest since
February.
Signs of increased hedging activity can also be seen in U.S. crude futures time
spreads. The premium for U.S. crude for delivery in December 2021 has climbed to
more than $2.80 a barrel over those for delivery in December 2022 this week, a
signal that producers are selling the later-dated contract to fund their hedges
for 2021, dealers said.
(Reporting by Devika Krishna Kumar in New York and Jennifer Hiller in Houston;
Editing by Marguerita Choy)
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