The recent surge in oil prices from 13-year lows back in February may have potentially saved a handful of U.S. shale producers, but it has created some difficult hedging decisions for the entire industry.
Oil producers have the option of using hedging to lock in current oil prices for 2017 and beyond. However, at current prices, many shale producers are barely (if at all) breaking even. Hedging at current prices essentially guarantees that they won’t be seeing major profits anytime soon.
The flip side, of course, is companies that are hedged will avoid the potential fallout and credit risks associated with another future plunge in oil prices below $30/bbl.
“Given the fragility of market rebalancing, and the financial exhaustion of many U.S. onshore oil producers, the safer course is to start locking in at current prices, even at the risk of giving away some upside,” Reuters oil expert John Kemp argues.
The break-even price for the majority of Eagle Ford shale production, for example, is in the $40-$60/bbl range, which highlights the difficulty of a potential decision to hedge at the current price of around $45/bbl.
The Wall Street Journal reports that, despite the surge in prices, U.S. producers have hedged just 36 percent of their expected 2016 output.
EV Energy Partners, L.P. EVEP 3.41% and Pioneer Natural Resources PXD 1.16% are…
Click here to continue reading
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
