As the US shale revolution transforms global trade in oil, it is also causing upheaval in the derivatives market – and making life harder for America’s shale producers.
The companies behind rising US crude production are selling more of their output in advance to guarantee revenues. That is putting downward pressure on future oil prices – making it harder for those companies to enter crucial hedging contracts.
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The principal reason for the downward drift in prices, say analysts and traders, is the hedging activities of shale oil producers themselves. As the volume of production in the hands of independent producers grows – EOG, a bellwether independent oil producer, doubled crude and condensate production between 2010 and 2012 – so does their hedging activity.
Um, no. This is a classic case of someone confusing correlation for causation. What’s driving down prices is the rise in output: the rise in output is also leading to more hedging activity. Yes, there will come a point where price comes down to a level that some producers will find it better to keep the oil in the ground. That’s the market in action.
There’s also this fascinating detail:
“There has always been a mismatch between producers and consumers in the futures market, but the increase in production by independents has made it worse,” says Jonathan Whitehead, global head of commodities markets at Société Générale.
Hmm. Buys and sells are equal in equilibrium. So just who balances that mismatch? Think. Think. Think.
Let me venture a wild guess: Speculators? So you mean that speculators are needed even more now than ever before? That without speculators hedging would be even more costly, and that would depress oil production?