Some of America’s biggest oil groups are racking up tens of billions of dollars in hedging losses despite soaring crude prices, as contracts signed during last year’s crash left them selling their output at deeply discounted prices. Oil is trading near six-year highs of around $75 a barrel, but almost a third of the US’s 11m barrels a day of production is being sold for just $55 a barrel, according to IHS Markit, a consultancy.
The figures will offer comfort to the Opec cartel that rallying prices are not about to spark another market-busting surge in American shale production. “Opec gets a pass to keep lifting prices right now if it wants to, without fearing much of a US supply response,” said Bill Farren-Price, an analyst at Enverus. “Shale producers are locked into selling their oil cheaply this year. ”
IHS Markit said US oil hedging losses in the first half of 2021 had already hit $7-5bn, but would rise by another $12bn if crude remained at $75 a barrel until the end of the year. Many Wall Street forecasts suggest it could go higher.
Last week a political spat between Saudi Arabia and the United Arab Emirates left the Opec cartel unable to agree on a plan to restore oil production, which it cut lastyear in an effort to prop up global crude prices.
Many of the hedges agreed by operators were signed during the worst months of last year’s crash, when creditors demanded that companies buy insurance against further price drops.The initial reaction of the market was to fear a growing supply shortage, sending prices higher. They have since pulled back, as some traders speculated the cartel could fray and countries such as Saudi Arabia and Russia could start producing at a much higher level.
In the wake of vaccination breakthroughs and Opec’s output cuts since then, those hedges now look far too pessimistic.
“If you get hedging right, people don’t give you credit for it. If you get it wrong, you get hammered,” said Raoul LeBlanc, a vice-president in IHS Markit’s unconventionals team. “They missed the boat this year. “Analysts at JPMorgan said that surging US oil prices in recent months now left almost all the hedges made by the companies it covers underwater.