US Shale Firms Snap Up $50 Oil Hedges, Risking Rally Reversal

Last week, the average price for all 2016 contracts on the U.S. WTI benchmark - known as the "strip" - rose more than 7 percent to above $53 a barrel, near its highest since late July. Apart from a fleeting price spike in late August, it is the broadest gain since April. The 2017 strip traded above $55 a barrel.

"What we're seeing now is one of the better opportunities for producers to hedge," said John Saucer, vice president of research and analysis at Mobius Risk Group, which advises firms including producers on energy hedging strategies.

Urgency displayed by producers in locking in present prices may be due in part to timing. Some firms are still engaged in the bi-annual process of reviewing, or 'redetermining', credit lines with banks. Lenders are under pressure to cut back on funding as falling oil and gas prices have slashed the value of reserves that serve as collateral.

"When producers are heading into redeterminations - all of a sudden, you've done something to shore up your potential borrowing base," said Saucer.

And most firms have a lot of shoring up to do.

North American exploration and production companies so far have only hedged 11 percent of their expected 2016 oil and gas production, according to a study of 48 firms published by consultancy IHS Energy last week. That is down from 28 percent for the rest of 2015.

To be sure, many producers may still be holding back, hoping for a more sustained upswing. One influential forecaster, consultancy PIRA Energy Group's Gary Ross, told clients last week that oil was headed above $70 by 2017.

If so, the market would face another, even larger, wave of producer selling around $60 to $65 a barrel. Michael Tran, an energy strategist with RBC Capital Markets in New York expects that to be "the key level of interest for producers to really ramp up hedging programs in larger size."

(Reporting By Catherine Ngai and Jessica Resnick-Ault; Editing by Jonathan Leff and Tomasz Janowski)


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