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Increased Oil Hedging Hints At Permian Production Boom

Zainab Calcuttawala

Oil hedges have become popular amongst U.S. shale drillers, who have used the financial trick to lock-in higher prices for their raw goods as barrel prices edge higher.

The prices of half of all shale production this year have been locked in using futures contracts. After the fourth quarter, U.S. oil companies increased their hedges to 48 percent, compared to just 30 percent after the third quarter, according to a note by Goldman Sachs.

Protected prices on future production make it easier for drilling to boost output and lower spending, attracting investors to the oil and gas sector.

"We believe the continued rise in 2018 producer hedging facilitates (oil companies') plans for capital discipline, reducing cash flow volatility," Goldman analysts wrote in a client note.

The wave of hedging has showed up in exchange trade data for the U.S. West Texas Intermediate (WTI) grade. The number of open contracts that have yet to be settled has jumped by nearly a quarter since June, according to Reuters. “The reason is producer hedging in USA as well as the funds all being very bullish. Shale producers will use WTI as a hedging instrument and not Brent,” Oystein Berentsen, managing director for Strong Petroleum in Singapore, told Reuters in an interview earlier in October.

In addition, the rig count has continued to rise in the Permian, where most of the shale action is these days. New hedges could allow Permian producers to continue their drilling efforts, which suggests more production could come online in the months ahead.

Shale output at seven major U.S. oil and gas plays will climb by 131,000 barrels per day in April to hit a 6.954 million bpd according to the Energy Information Administration (EIA). The Permian Basin, in New Mexico and Texas, will see the biggest climb, the data shows.

By Zainab Calcuttawala for Oilprice.com

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