U.S. shale oil companies are hedging against future price drops as West Texas Intermediate enjoys a rebound above $50 a barrel, Reuters has reported, citing unnamed sources in the know.
Crude oil prices had been recovering slowly during the final quarter of last year, and they jumped sharply earlier this month as vaccine rollout advanced, albeit slowly, in the United States and Europe. At the same time, Saudi Arabia served a pleasant surprise to oil markets by declaring it would cut an additional 1 million bpd from its production on top of cuts agreed with OPEC+.
As a result, WTI hit the highest since February last year, trading at over $52 a barrel at the time of writing. Brent crude rebounded to above $55 a barrel.
According to the Reuters report, short positions on oil contracts in the futures and options market opened by producers have been rising since last fall, hitting a five-month high in the middle of December. They may have continued to rise this month as oil benchmarks continued improving.
Optimism is growing in the industry, according to Reuters sources, who said some shale producers are waiting for prices to rise even higher before they lock in production on the market.
“Some of them (producers) are pretty torn between hedging at a level they would have killed for six months ago and their perpetually optimistic nature,” Steve Sinos, VP at consultancy Mercatus Energy, told Reuters.
Production growth in the shale patch, meanwhile, is little likely in the short term, according to forecasters and the industry itself. Despite the optimism, perpetual or temporary, shale companies are wary of another price slump, despite OPEC+ cuts, and are taking a cautious stance. At the moment, they are focusing on free cash flow, the Reuters sources also said.
By Irina Slav for Oilprice.com
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