Hedging makes shale drillers less susceptible to OPEC whims

Bloomberg/Fuel Fix:

OPEC’s worst enemy isn’t U.S. shale drillers. It’s the hedges propping them up.

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.”

Oil prices took another hit on Tuesday after Saudi Arabia dropped a bombshell on the Organization of Petroleum Exporting Countries: the Saudis, heavyweight of the 13-nation cartel, raised its output last month to more than 10 million barrels a day, reversing about a third of the cuts it made the previous month.

Though Saudi Arabia is still meeting its commitment even with the increase, other members are lagging and the disclosure intensified concern that the group won’t be able to muster enough of the promised cuts to strengthen the market.

Just last week, Saudi Energy Minister Khalid Al-Falih warned a Houston energy conference that the kingdom won’t indefinitely “bear the burden of free riders,” a veiled shot at Russia, Iraq and the United Arab Emirates, which have yet to deliver all the curbs they promised....
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I suspect that Iraq is desperate to fight its war with ISIL and Russia needs the revenue because of its poor economy and the pain the sanction regime imposes on it because of aggression in Ukraine and elsewhere.  What is becoming obvious is that OPEC has no control mechanism beyond the self-restraint of its members and that has faded with its inability to control prices the way it could before competition from shale drillers.