US Oil Producers Reducing Hedging Activities

We often argue that economic hedge is a necessary risk management tool

To Hedge or Not to Hedge

Hedging Should be Based on Risks and Not on Forecasts

Last week, Alex Nussbaum et al. of Bloomberg reported that based on the put skew in the oil option market, the US producers are reducing their hedging activities:

Oil bulls, take heart! U.S. drillers have dramatically reduced their hedging activity, a move that could portend a break in the production gains that have upended global crude prices.

The relative cost of options protecting against a drop in West Texas Intermediate crude has fallen to its lowest since August, thanks to a big drop in producer hedging, Societe Generale SA said on Friday. The so-called put skew for contracts delivered a year from now — weighing the difference in value between bullish and bearish options — fell to just below 6 percentage points, after rising above 8 points in February.

However, the article also pointed out the benefits of the existing hedges

Still, drillers are also forging ahead with plans to increase production, in part thanks to the financial cushion provided by existing hedges. Pioneer Natural Resources Co., one of the most prolific actors in Texas’ Permian shale basin, has contracts in place for 85 percent of its expected oil and natural gas output this year, the company said on a May 4 conference call. Read more

So after all, hedging is beneficial for the commodity producers.

ByMarketNews