• Thursday, March 28, 2024
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Hedging losses of US shale producers may hit $10bn in 2022- Rystard Energy

Ten steps to foster global energy transition- Rystad Energy

The United States shale oil producers could face more than $10 billion in hedging losses this year even as crude prices hover around the $100 a barrel mark, according to Rystad Energy.

Hedging is a form of risk management that allows oil producers or consumers to lock in a future price to protect against unfavourable price swings.

US shale producers, however, hedged a large portion of their output for this year at prices that are well below the levels seen so far in 2022, meaning they’ve been unable to capitalize on the rally in crude to multi-year highs fueled by Russia’s war with Ukraine.

According to consultant Rystad Energy, US shale oil producers currently have 46percent of their expected crude oil output for the year hedged. Of that total, 42percent is hedged at a West Texas Intermediate (WTI) average floor price of $55 a barrel. US crude is trading just below $90 a barrel, having hit a high this year above $130.

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To that effect, shale companies reported an average loss of $21 a barrel in the second quarter from selling at their hedged prices, Rystad said.

“With huge losses on the table, operators have been frantically adapting their hedging strategies to minimize losses this year and next,” said Alisa Lukash, vice president at Rystad Energy.

Many shale operators have successfully negotiated higher ceilings for their 2023 crude oil contracts, so even if oil prices fall next year, they won’t be as exposed.

WTI prices have risen nearly 30percent year-to-date thanks to Western sanctions on Moscow’s energy sector squeezing supply in the domestic market and US producers have raced to export their crude to places that would normally have bought Russian oil.

Rystad said it had analysed the results of 28 shale producers whose estimated output accounts for nearly 40percent of total shale output, including Chesapeake Energy, EOG Resources and Hess.

It said the group includes all public hedging activity in the sector but excludes the so-called “supermajors” such as Exxon or Chevron, which do not use derivatives to hedge their output, or privately owned producers, which don’t publish information on their hedges.

Oil prices have remained volatile this year. Brent touched about $140 barrel in March. However, it gave up most of its gains in the last few months as concerns grew over the possibility of a recession hitting fuel demand globally.

In July, the International Monetary Fund lowered its growth forecast for the global economy to 3.2 percent this year, from its previous forecast of 3.6 percent in April, owing to Russia’s war in Ukraine, high inflation and the Covid-19 pandemic.

Brent, the global benchmark for two-thirds of the world’s oil, was trading 0.48 percent lower at $94.64 a barrel at 6.42 pm UAE time on Tuesday.

West Texas Intermediate, the gauge that tracks US crude, was down 0.39 percent at $89.06 a barrel.

Hedging paid off during the coronavirus-induced crash of 2020 but turned painful as recovering economies and Russia’s war in Ukraine lifted energy prices to historic highs.

“Anticipating the significant negative impact of these hedges, shale operators made a concerted effort in the first half of this year to lower their exposure and limit the impact on their balance sheets,” Rystad said.

Many operators have successfully negotiated higher ceilings for 2023 contracts and, based on current reported hedging activity for next year, even at a crude price of $100 per barrel, losses would total $3bn, a significant drop from this year, according to the research company.

“At $85 per barrel, hedged losses would total $1.5bn; if it fell further to $65, hedging activity would be a net earner for operators,” Rystad said.

Despite hedging losses, record-high cash flow and net income have been widely reported by US onshore exploration and production (E&P) companies this earnings season.

“These operators are now adapting their strategies and negotiating contracts for the second half of 2022 and 2023 based on current high prices, so if oil prices fall next year, these agile E&Ps will be able to capitalise and will likely boast even stronger financials,” Rystad said.