U.S. shale producers pounced on the chance to lock in future revenue for this year and next after oil prices surged by the most in 30 years early this week following attacks on Saudi Arabia's oil facilities, sources familiar with the money flows said.
The additional protection at higher prices could boost U.S. production growth rates, they said, after slowing earlier this year as investor pressure forced companies to rein in spending.
Crude swap activity spiked sharply on the heels of the attacks in Saudi Arabia, which temporarily knocked out about 5% of global supplies. Swaps are a type of contract that allow producers to lock in or fix the price they receive for their oil production.
When oil companies hedge against fluctuations in oil prices, they use derivatives contracts to lock in prices at advantageous levels, allowing companies to maintain output.
Swaps equal to about 31 million barrels of U.S. crude and about 6.5 million barrels of Brent changed hands on Sept. 16, dealers said last week. About 24 million barrels were for contracts expiring in 2020, about 11 million barrels were for 2019 and the rest for 2021.
By Sept. 17, just over 7 million barrels in crude swaps traded, closer to average daily levels, they said.
"I wouldn't be surprised if we see companies roll out with third-quarter reports that they took the opportunity to hedge a lot of 2020 production," said R.T. Dukes, research director for U.S. lower 48 upstream at Wood Mackenzie.
The majority of the new 2019 hedging was done around $60 per barrel, with 2020 hedging seen at about $55 to $58 and some 2021 hedging around $58 in Brent and $52 in U.S. crude, one broker said.
The oil market jumped nearly 20% on Sept. 16 in reaction to the Sept. 14 attack, with front month Brent contract soaring to nearly $72 and U.S. crude hitting a high over $63. By Sept. 20, they were trading at below $65 and $59, respectively.
The oil rig count, an indicator of future output, has declined for a record nine consecutive months to the lowest in more than two years as shale companies cut spending on new drilling to focus more on earnings growth instead of increased output.
"There's been a ton of rigs going off the grid the last 6 months. Maybe you'll see some come back now," one broker said.
Options activity also surged with about 47,500 lots trading hands on Sept. 16, primarily in U.S. crude, dealers said. The Energy Information Administration last week lowered its forecast for U.S. crude production growth to an increase of 1.25 million barrels per day (bbl/d) in 2019 to a record 12.24 million bbl/d.
For some, the opportunity came too late in the year.
"We are already fully hedged for the remainder of 2019 and 2020 under our bank agreement," said Bob Watson, CEO at Abraxas Petroleum Corp by email. "Would have liked to lock in some 2021 but they didn't react much and therefore not a good opportunity."
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