Nick Oxford/Reuters
- Nearly a third of US oil output is being sold at $55 a barrel, according to the Financial Times.
- Hedging contracts taken out during the depths of the pandemic locked in low oil prices for producers.
- A brisk recovery and OPEC oil-supply cuts have pushed up crude prices, sinking US producers' hedges.
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Oil prices above $70 have not lifted the fortunes of some US shale producers who have been stuck selling at pandemic-era oil prices, according to a report in the Financial Times.
Nearly a third of US oil output is being sold at $55 a barrel, while some especially unlucky producers are selling below $50, the FT reports, citing IHS Markit data.
The culprit is hedging contracts taken out during the depths of the pandemic, effectively locking in low oil prices for producers who had feared further price declines. In April 2020, as it became prohibitively expensive to store oil, West Texas Intermediate crude traded at sub-zero values for the first time ever, briefly bottoming out at -$37.63 per barrel.
As a result, shale producers rushed to hedge against persistently low prices, leaning on swaps to bet against oil going up. But a brisk recovery and OPEC oil-supply cuts have pushed up crude prices, sinking US producers' hedges, according to the FT.
Some of the sharpest losses are hitting Pioneer Natural Resources, the largest producer in Texas's Permian Basin region, which is committed to selling almost 200,000 barrels a day below $50 per barrel through 2021. That has added up to an expected $900 million loss from hedging this year, according to JPMorgan.
"If you get hedging right, people don't give you credit for it. If you get it wrong, you get hammered," Raoul LeBlanc, a VP at IHS Markit, told the FT.
"They missed the boat this year," he said.