U.S. oil producers lock in higher prices
For OPEC and others with high hopes of American companies trimming output, it’s a frustrating time because of hedging
The oil market’s recent tumble below $50 a barrel won’t stop U.S. drillers from pumping more crude even as OPEC and other major producers work to drain the world’s oil glut.
Dozens of U.S. oil companies, including the Houston area’s Anadarko Petroleum Corp., Marathon Oil Corp., Noble Energy, Apache and Cabot Oil & Gas, made deals to lock in higher prices for future oil production after prices surged to nearly $55 a barrel earlier this year.
That’s bad news for OPEC and anyone else who held out hope that the fear of falling prices would temper growth in U.S. oil production, reduce supplies and eventually lead to higher prices, said Andy McConn, an analyst at energy research firm Wood Mackenzie in Houston.
“You’d think they’d spend less and pull back on activity,” McConn said. “But actually a lot
of these companies are insulated from the damage lower oil prices would do.”
In the fourth quarter, these oil companies used the trading technique known as hedging to guarantee they can sell 237 million barrels of oil they produce this year for $50 to $60 a barrel, up from 61 million barrels last year, Wood Mackenzie said Monday in a new report.
On an annual basis, that means companies have secured these higher prices for 649,000 barrels of oil production a day, or 27 percent of expected output, this year. That’s up from 167,000 barrels a day, or 17 percent of expected output, last year.
That oil hedging activity came after crude prices surged on the announcement by 24 oil-producing nations including Saudi Arabia and Russia that they’d slash oil production to prop up energy prices after the worst oil market collapse in decades. Anadarko and Apache hedged the most, Wood Mackenzie said.
Hedging is one of the levers U.S. oil companies have pulled in a bid to restart the shale oil business after domestic oil production sank by more than 1 million barrels a day last year.
The number of oil and gas rigs drilling across the United States has doubled since May, and since July domestic crude output has climbed by 700,000 barrels a day to 9.13 million barrels a day, according to the Energy Department.
That recovery, even as it lifts the fortunes of hundreds of Houston oil field services companies, could weigh on prices later this year.
“It’s really going to stick it to OPEC and their plans for price stabilization,” said John Kilduff, an oil market analyst at Again Capital in New York. “OPEC will have to cut more, and the Saudis are going to have to shoulder the burden of losing more market share.”
U.S. oil prices edged down 24 cents to $47.73 a barrel on the New York Mercantile Exchange on Monday. The price had settled as high as $54.45 a barrel in February, but it fell after it became clear U.S. commercial oil inventories were still growing despite OPEC’s oil production cuts.
On Sunday, a committee of officials from OPEC and other countries said they have recommended the oil producers extend cuts beyond the expiration date of the output agreement this summer, in large part because global supplies are not decreasing as quickly as hoped.
The hedging activity, which allows U.S. producers to keep pumping oil, McConn said, “is bad news if you’re OPEC.”