Industry
U.S. coal shale producers are taking advantage of the oil market’s rally to unprecedented levels in nearly a year by locking in prices for future sales, said sources familiar with the matter.
PHOTO FILE: Oil well site in the Eagle Ford Shale oil field in Texas, USA, May 18, 2020. REUTERS / Jennifer Hiller
NEW YORK / HOUSTON: U.S. coal shale producers are taking advantage of the oil market’s rally to unprecedented levels in nearly a year by locking in prices for future sales, said sources familiar with on the case.
U.S. crude futures jumped this month above US $ 50 a barrel to the February high. The rally has sparked optimism among coal-mining companies, but after a tough year of devastating demand with a pandemic, they are not ready to ramp up production. Instead, they are using futures markets to lock in higher selling prices.
Coal manufacturers buy and sell contracts in the futures and options markets in a process called hedge to generate cash flows for later sales.
U.S. oil output peaked at nearly 13 million barrels per day at the end of 2019, but is now around 11 million bpd after coronavirus blockades crushed fuel demand and oil prices. Yields are not expected to rise much in 2021, but those who have calmed down now promise to sell barrels at more than US $ 50 even if prices fall again.
“There’s a lot of hedge going on,” said Chris Wright, chief executive of Liberty Oilfield Services, the second largest bankruptcy company in North America. “At the prices available today, producers with good anchors can do well.”
Producer short positions in futures and U.S. crude options, a sign of hedge activity, have been on the rise since the fall. They hit a five-month high in mid-December, according to the U.S. Commodity Futures Trading Commission.
In 2020, 46 North American research and manufacturing companies declared bankruptcy, according to energy law firm Haynes and Boone, while others joined forces to reduce debt. Investors had already been pressuring coal companies to curb consumption and rise back even before the pandemic.
“Producers locked in a quantity of wells at a certain price and hoarding at US $ 50 will make you look like a rock. This year will be about free cash flow,” said one official at a U.S. coalstone representative, on condition of anonymity.
Domestic producers seem to lock in about 15per percent to 20per percent of production at the same time, said Tom Petrie, chairman of energy investment bank Petrie Partners.
Some companies are holding back because they expect prices to rise further, perhaps to US $ 60 or US $ 65. Brent crude global benchmark, which also hit 11-month highs in the year. this week near US $ 57, rising to US $ 65 per barrel by summer 2021, Goldman Sachs said this week.
“Some of them (representatives) are torn right between a hedge at a level they would have killed six months ago and the always optimistic nature,” said Steve Sinos, vice president at the council. Mercatus Energy, which advises corporations on domestication.
Average U.S. 2021 prices have risen above US $ 52, also the highest level since February.
Signs of increased hedge activity can be seen in U.S. crude futures spreads. The price for U.S. crude for delivery in December 2021 has risen to more than US $ 2.80 a barrel over those for delivery in December 2022 this week, a sign that producers are selling a later contract to fund their hedges for 2021, retailers said.
(Reporting by Devika Krishna Kumar in New York and Jennifer Hiller in Houston; Editing by Marguerita Choy)