Even though oil prices plunged to as low as $30 per barrel this week and are likely to go even lower as OPEC+ plans to increase production from April, US shale oil operators expect to save billions in record-high hedging gains in 2020, a Rystad Energy impact assessment shows.
Rystad Energy’s assessment is based on an analysis of a representative peer group of 30 dedicated US light tight oil firms with a combined output of about 38% of the total expected US oil production in 2020, excluding royalties.
Looking at the hedging positions of the considered companies, we conclude that they hedged almost 50% of their guided 2020 output at an average price floor of $56 per barrel.
The analysis shows that we might see a record-high cumulative hedging gain in the industry if the West Texas Intermediate (WTI) oil price stays below $40 per barrel. To be precise, the peer group’s hedging gains can be as high as $10.5 billion in a $40 WTI environment, potentially rising to $17 billion if WTI averages $25 in 2020.
To put the savings into perspective, the hedging gains in a $35 WTI environment are equivalent to more than 25% of the peer group’s capex guidance of $45 billion for 2020.
“The industry is well-positioned to mitigate the effects of an oil-price collapse in the short term thanks to the material cash flow support from derivative contracts,” says Artem Abramov, Rystad Energy’s Head of Shale Research.
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