When oil prices rocketed towards $60 a barrel (bbl) this fall, U.S. shale producers hedged more barrels of oil during the quarter than in at least three years, which could help propel the country to record crude production by next year.
More than 144 million bbl were added to hedges after global oil markets rallied by as much as $13 in the quarter. Higher prices help producers lock in profits for future sales.
That should guarantee that total production exceeds 10 million bbl/d in 2018, which would be an all-time record for U.S. drilling. Traders say growth next year will likely exceed government forecasts, heralding a record year that could pressure prices in the near term.
For oil traders, hedging data from shale companies serves as a leading indicator of future supplies.
"After a slow start in the first half of 2017, U.S. oil producers sped up hedging activities for their 2018 production in third-quarter amid the rebound in crude oil prices," Citigroup analysts said in a note last week.
According to a Reuters analysis of hedging disclosures by the 30 largest U.S. shale firms, most rushed back into hedging in the three months to Sept. 30.
In total, 17 companies increased outstanding oil options, swaps or other derivatives positions by 144 million bbl between the second- and third-quarter. Another 10 companies decreased their hedging positions by 31 million bbl; three others did not hedge at all.
Together, the companies have nearly one-third more barrels hedged, or the equivalent of 129 million bbl, compared to the previous quarter.
Reuters compiled the data through information publicly available in quarterly regulatory filings.
Citigroup analysts said the third-quarter hedge ratio—the percentage of production where shale companies have locked in future sales—for 2018 jumped from 12% to 27%. For the same period in 2015 and 2016, producers had locked in 15% and 18% of the coming year, they said.
Several firms, including Hess Corp. (NYSE: HES), Newfield Exploration Co. (NYSE: NFX) and Marathon Oil Corp. (NYSE: MRO) loaded up their hedges, and more than doubled volumes last quarter. Together, they added 74 million bbl.
All 30 firms contacted by Reuters either did not respond to a request for comment or referred to questions about strategy to recent earnings calls.
Shale firms are said to have continued adding to hedges in the fourth quarter. Swap dealer gross shorts data from the Commodity Futures Trading Commission, an indicator of producer hedging activity, touched a record in the most recent week.
Last week, a Texas-based producer was said to have hedged some 30,000 bbl/d for 2018 in U.S. crude futures, according to two sources familiar with money flows.
U.S total oil production is expected to rise by 780,000 bbl/d to 10.02 million bbl/d next year, which would be a new annual record, according to the U.S. Energy Information Administration (EIA). Traders estimate that growth could be as high as 1.2 million bbl/d, with at least 500,000 bbl/d to 600,000 bbl/d out of Texas's prolific Permian Basin alone.
That could complicate an extension by OPEC to curb global supplies through 2018 to keep prices low.
But forecasts for new output may be optimistic, said John Saucer, vice president of research and analysis at Mobius Risk Group in Houston.
"People have modeled in the absolute perfection when it comes to drilling. I think we'll see new growth, but there's a lot of evidence that getting new fracking and completion crews is tough," he said.
Drilled but uncompleted wells rose for a 12th straight month to a record in November, according to EIA data dating to December 2013.
Despite greater levels of hedging, and the rise in production, the U.S. crude forward curve remains in backwardation, a market structure where near-term prices are higher than those in the future.
On Dec. 20, West Texas Intermediate (WTI) for December 2019 was trading around $2.46/bbl over WTI for December 2018. That spread, a popular trade, signals the health of the oil market.
That implies U.S. supply is unlikely to overwhelm global markets, Saucer said.
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