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How Hedging is Protecting U.S. Oil Drillers

OPEC recently increased its oil production to 10 million barrels per day. This was an unexpected move designed to reduce the price of oil globally. However, at this point, U.S. shale fields remain profitable. An oil and gas reserves evaluation is still necessary even though the petrochemical companies know where the oil is located. The primary variable is how much it will cost to develop productivity.

How does shale oil maintain such a consistently positive outlook? It all comes down to hedging.

What Is Hedging?

Hedging enables oil producers to lock in future prices by establishing financial contracts guaranteeing the price of their oil. Hedging is problematic for any countries that have agreed to the OPEC-sponsored cut in production that was intended to raise prices by tightening supplies. The plan is meant to help offset the languid national economies of some OPEC members.

While the evaluation of leads and prospects is not as critical at this time, hedging certainly is. It obligates the contract buyer to purchase the oil at the agreed price in the futures contract. It also enables the contract holder to sell the oil at the price for which the futures contract is valued later. Normally, the end result of these contracts is not an actual delivery of the oil. Most of them are resold or repurchased by the owner before they expire.

Thanks to hedging, American oil explorers were able to withstand this year’s decline in price from $55.24 to $48 per barrel. Katherine Richard, CEO of Warwick Energy Investment Group, said that the price would have to drop into the $30 per barrel range or lower before it would affect the bottom line of most U.S. shale field drillers. She also said that the cowboy spirit is back and that hedging is chiefly responsible. In short, Texas oil is booming once again.

It is possible that oil prices will be driven even lower in the near future. Those drillers in the richest shale zones will continue earning sizeable profits, which will most likely encourage them to increase their output. Richard believes that this could cause companies on the edges of these teeming zones to fail because they will not be able to afford production if the price does decline.

To learn more about hedging or to inquire about oil and gas training courses, contact Rose and Associates at 713-528-8422. We have a dedicated team of experts who provide superior integrated methods for managing oil and gas exploration.



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