Hedges Protect US Shale Firms

American frackers have been enjoying 2017 thus far. These companies have taken advantage of a $10 bump in crude prices, itself the result of petrostate production cuts, to increase the number of rigs in operation and start once again boosting output. Our overall production has climbed above 9 million barrels per day (bpd) for the first time in a year, up more than 500,000 bpd over the past five months, and this rise is helping to offset those aforementioned cuts being made by OPEC and 11 other non-member petrostates.

Prices have stumbled recently on rising global stockpiles of crude and concerns over the fact that the Saudis actually increased their output last month. Shale producers were forced to ratchet down production during the price collapse of the past two years as certain plays ceased being profitable, but if prices were to plummet again, this time around U.S. companies are better prepared for $40 crude. Bloomberg reports:

American oil explorers who survived the worst of the 2014-2016 market rout are shrugging off the 14 percent slide in prices this year from a high of $55.24 to less than $48 a barrel Tuesday. The price would have to drop to the $30s or lower to dent the bottom line of many drillers now working U.S. shale fields, said Katherine Richard, the CEO of Warwick Energy Investment Group, which own stakes in more than 5,000 oil and natural gas wells.

That’s because many producers have already locked in future returns with financial contracts that guarantee the price of their oil for most of the rest of the decade. Such resilience poses a dilemma for countries that agreed to an OPEC-led production cut aimed at tightening supplies to raise prices and relieve their distressed national economies.

“We’re in a boom again in Texas, despite what’s happening with prices lately,” said Michael Webber, deputy director of the University of Texas’ Energy Institute in Austin. “The cowboy spirit is back. Hedging is playing a big role.”

Of course, the biggest difference between the U.S. producers today and the shale industry of 2014 isn’t how well it’s hedged, but how much lower its breakeven costs—the prices companies need to sell their product in order to turn a profit—are. Fracking has become a lot more efficient, and yields per rig have gone up while operating costs have dropped.

Petrostates will have to decide soon whether to extend their output cuts past a rapidly approaching June cut-off; if they don’t, we can expect oil prices to fall once again. This time around, America’s energy position is looking a lot more secure.

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