US shale producers are locking in prices for their production as much as three years into the future in a sign that strong domestic crude pricing is nearing a peak, according to market sources familiar with money flows. American crude prices for 2019 and 2020, based on an average of each year’s monthly contracts, have climbed this week above $68 and $64 a barrel, respectively, the highest levels in over three years, Arab News reported.
The rally comes even as front-month prices have dropped from the high of three and a half years touched during the summer.
“Hedging activity has picked up considerably over recent weeks and this will continue to be the case as producers begin to frame budgets for next year,” said Michael Tran, commodity strategist at RBC Capital Markets, noting that the rally in forward prices are encouraging the producer bets.
Hedging can reduce risks associated with volatility in oil prices, acting as an insurance contract to lock in a future selling price and fix spending plans. Such longer-term bets signal US producers will continue to expand output, keeping a lid on prices, according to crude traders and brokers. The nation’s output this year has climbed above 10 million barrels per day, close to top producers Russia and Saudi Arabia. That output is forecast to grow next year by 840,000 bpd to average 11.5 million bpd.
There was a large uptick in crude swap activity last week, with just shy of 8 million barrels changing hands in a day, an energy derivatives broker said, signaling strong hedging interest. Swaps are a type of contract that allow producers to lock in or fix the price they receive for their oil production. Almost 80% of the swap activity were split evenly between calendars 2020 and 2019, and the remaining 20% for this year, the broker said, adding that there was a small amount of calendar 2021 activity during the week.
