Producers Once Again Rush to Hedge Production After Oil Price Increase
U.S. shale oil companies are using the post-OPEC rally to hedge their oil price risk for next year and 2018 above $50 a barrel, bankers, merchants and brokers said, pushing the forward oil curve upside down.
The rush to hedge -- locking in future cash flows and sales prices -- could translate into higher U.S. oil production next year, offsetting the first output cut by the Organization of Petroleum Exporting Countries in eight years. As such, the producer group could end up throwing a life-line to a sector it once tried to crush.
“Right after OPEC, U.S. producers were very active hedging," said Ben Freeman, founder of HudsonField LLC, a boutique oil merchant with offices in New York and Houston. "We are going to see a significant amount of producer hedging at this levels."
The hedging pressure triggered violent movements across the price curve. As shale firms sold oil for delivery next year and early 2018, the shape of the curve flattened. "The curve is screaming producer hedging," said Adam Ritchie, founder of consultant AR Oil Consulting and a former trading executive at Caltex Australia Ltd. and Royal Dutch Shell Plc.
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