US shale groups lock in revenues as output nears Saudi and Russian levels

A gas flare burns at a fracking site in rural Bradford County, Pennsylvania. (Reuters)
Updated 13 September 2018
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US shale groups lock in revenues as output nears Saudi and Russian levels

  • Hedging activity picks up pace
  • Swaps increased last week

NEW YORK: 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.
US 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. The rally comes even as front-month prices have dropped from the three and a half year highs 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 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 (bpd), 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 percent of the swap activity was split evenly between calendars 2020 and 2019, and the remaining 20 percent for this year, the broker said, adding that there was a small amount of calendar 2021 activity during the week.
The market sources declined to say which oil companies were actively hedging in recent weeks.
The move to hedge at these levels could prove risky for producers in a market where the price of oil for immediate delivery is higher than for later deliveries.
Many US shale producers hedged second-quarter production at about $55 a barrel, which backfired as US crude climbed to more than $70 a barrel last quarter, the highest level since 2014.
As a result, producers are using more “collars,” a financial instrument that provides price protection on the downside while allowing them to share in some of the upside if prices rally.
“We’ve been building a lot of collar structures,” Christian Kendall, chief executive of Denbury Resources Inc. said last week, noting that the instruments will protect its production at about $60 a barrel and provide upside if oil rises to the high $70s per barrel.
Denbury is nearly 50 percent hedged for 2019 and will add hedges to get to 60 percent to 70 percent of production, Kendall said.


South Korea downgrades Japan trade status as dispute deepens

Updated 18 September 2019

South Korea downgrades Japan trade status as dispute deepens

  • The change comes a week after South Korea initiated a complaint to the World Trade Organization
  • The new measures in effect mean it might take up to 15 days for South Korean companies to gain approvals to export sensitive materials to Japan

SEOUL, South Korea: South Korea on Wednesday dropped Japan from a list of countries receiving fast-track approvals in trade, a reaction to Tokyo’s decision to downgrade Seoul’s trade status amid a tense diplomatic dispute.
South Korea’ trade ministry said Japan’s removal from a 29-member “white list” of nations enjoying minimum trade restrictions went into effect as Seoul rearranged its export control system covering hundreds of sensitive materials that can be used for both civilian and military purposes.
The change comes a week after South Korea initiated a complaint to the World Trade Organization over a separate Japanese move to tighten export controls on key chemicals South Korean companies use to manufacture semiconductors and displays.
Seoul has accused Tokyo of weaponizing trade to retaliate against South Korean court rulings ordering Japanese companies to offer reparations to South Koreans forced into labor during World War II. Tokyo’s measures struck a nerve in South Korea, where many still resent Japan’s brutal colonial rule from 1910 to 1945.
According to South Korean trade ministry, the new measures in effect mean it might take up to 15 days for South Korean companies to gain approvals to export sensitive materials to Japan, compared to the five days or less it took under a simpler inspection process provided for favored trade partners.
Lee Ho-hyeon, a South Korean trade ministry official, said the change would affect about 100 local firms that export items such as telecommunications security equipment, semiconductor materials and chemical products to Japan. He said Seoul will work to minimize disruption to South Korean companies.
Japan for decades has enjoyed a huge trade surplus with South Korea, an economy that’s much more dependent on exports. Many major manufacturers heavily rely on parts and materials imported from Japan.
But the dispute is taking a toll. Exports to South Korea from Japan fell 9.4% last month, Japan’s Finance Ministry reported Wednesday.
The trade dispute between the neighbors erupted in July, when Japan imposed tighter export controls on three chemicals South Korean companies use to produce semiconductors and displays for smartphones and TVs, major export items for South Korea. It cited unspecified security concerns over Seoul’s export controls.
A few weeks later, Japan dropped South Korea from its own trade “white list,” triggered a full-blown diplomatic dispute that took relations between the US allies to their worst in decades.
The dispute has spilled over to security issues, with Seoul declaring it plans to terminate a bilateral military intelligence-sharing pact with Japan that symbolized the countries’ three-way security cooperation with the United States in the face of North Korea’s nuclear threat and China’s growing influence.
Following an angry reaction from Washington, Seoul later said it could reconsider its decision to end the military agreement, which remains in effect until November, if Japan relists South Korea as a favored trade partner.
Seoul announced its plans to downgrade Tokyo’s trade status in August before holding a 20-day period to gather opinions on the decision, during which the Japanese government voiced opposition to the move it described as “arbitrary and retaliatory,” Lee said.
He said Seoul needs to strengthen controls on shipments to a country that’s “hard to cooperate with” and fails to uphold “basic international principles” while managing export controls on sensitive materials.
South Korea previously divided its trade partners into two groups in managing export controls on sensitive materials. Following Wednesday’s change, South Korea now has an in-between bracket where it placed only Japan, which would mostly receive the same treatment in trade as the non-favored nations in what had been the second group.