Kemp: Continental Becomes Lightning Rod For Fears About Shale

Hamm was therefore correct that Continental had already benefited significantly from its hedges (they were monetised for $433 million, according to the company).

Continental exited its hedges sometime in October when the price of U.S. crude was between $90 and $80 per barrel. The future protective value of the hedge was already worth much less than it had been when U.S. crude prices were above $100 earlier in the year.

Hamm was correct that the balance of risks was more symmetrical after oil prices had already sold off than before.

But the future protective value of the hedges against further price falls at that time was still far from nothing. Oil prices have fallen by another $10 to $20 per barrel since Continental got out of the hedges.

Continental could argue that the hedges can protect it only from a temporary downturn in prices, not an enduring reset to a lower level. It might make sense to take gains already made on the hedges and then hope for a rebound in prices based on a judgment about the fundamentals of shale drilling and the oil market.

But a strategy in which the company hedges only through part of the price cycle and goes unhedged at other times is not really a hedging strategy.

It is effectively a market-timing strategy or a plain gamble. And it comes fraught with risks, as gold producers and other companies have found to their cost.


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