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US oil producers reeling from an 18-month price rout have cautiously begun hedging future production this week, fearing this may be their best chance yet to lock in a $45 a barrel lifeline for 2017 and beyond.
As oil markets rebounded from 12-year lows this week, US shale companies – for the first time in months – started inquiring and placing new hedges for the next few years, according to three market sources familiar with money flows.
Oil prices have crashed more than 70 per cent in the past 20 months, driven by near-record production by the Organization of the Petroleum Exporting Countries and other producers, adding to one of the worst supply gluts in history.
On Thursday, even as immediate-delivery oil futures ended slightly higher, US crude for December 2017 CLZ7 delivery fell more than 2 per cent to $43.47 a barrel, weighed down in part by producer hedging, the sources said. The 2017 WTI price strip rose as high as $43.55 in early trade; a month ago, it hit a record low of $37.38.
The re-emergence of hedging interest, which traders said was still limited in scope for now and mainly in the form of inquiries rather than execution, came as a surprise to some, surfacing below the $50 psychological threshold that some traders had thought would be needed to coax back producers.
“The $45 is break-even for a lot of producers. It's not just about making a profit, it's about staying alive,” one trader said.
The sources declined to say which companies were active this week, but some producers have been looking for an excuse to pounce. They may have found it this week, as prices surged on news that OPEC and non-OPEC oil producing countries would come together to freeze production at January levels and key producer Iran voiced its support for the output cap.
Denbury Resources Inc (DNR.N), for instance, said on Thursday that it had “recently” increased its fourth-quarter hedges to cover 30,000 barrels a day at around $38 a barrel.
On an investor call last week, Scott Sheffield, chief executive officer of Pioneer Natural Resources, one of the most heavily hedged drillers in the business, said he saw a good chance of more rumours stoking prices. Matador Resources said this week it had added to its hedges over the past two weeks, but did not say by how much.
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