U.S. shale producers have boosted their hedges to lock in higher oil prices for their production this year and next as oil prices shot up following the heightened tension in the Middle East at the end of last week, data compiled by Bloomberg shows.
Oil prices surged on Friday, following the assassination of Iran’s most powerful and visible military leader, Qassem Soleimani, by U.S. forces in Iraq. The attack was carried out following a direct order from U.S. President Donald Trump and was aimed at ‘deterring future attacks’ on U.S. diplomats and service members throughout the region.
Some U.S. shale producers took advantage of the price rally and placed additional hedges such as options strategies on Friday, to lock in high selling prices for 2020 and 2021, people with knowledge of the trades told Bloomberg.
The strategy to purchase financial options allows producers to ensure a minimum price for their crude oil and protect their revenues and production in case oil prices snap sharply back.
U.S. producers could benefit from these hedges and have relatively higher selling prices for their production at a time when shale production growth is slowing down and investors are rewarding discipline in spending and return on investments.
Apart from the U.S. producers, companies active in the North Sea have also increased hedging activity in recent days, traders told Bloomberg, after oil prices hit their highest level in seven months amid fears that a U.S.-Iran conflict may be imminent.
Early on Monday, the oil price rally continued, with Brent Crude prices exceeding US$70 a barrel for the first time since May last year. WTI Crude was also up, rising above US$64 a barrel, also the highest price level since May 2019.
On Tuesday morning, Brent Crude was down 0.8 percent at US$68.30 and WTI Crude was down 0.9 percent at US$62.71, as investors and speculators await an Iranian retaliation for Soleimani’s assassination, but are dialing down the panic that oil supply disruptions may be imminent.