Many top U.S. shale oil producers are missing out on the rally in oil prices to more than $70 a barrel - because they sold their oil through futures contracts at about $55 last year when that looked like a good deal. Now, it looks cheap.
Those hedged bets will hold down revenues and further frustrate Wall Street investors, who have been disappointed by slow returns from the booming Permian Basin in west Texas.
The top 25 shale producers will forego about $1.7 billion in combined revenues in the second quarter with oil prices at about $70, according to Denver-based consultancy PetroNerds. Many of those producers used hedges that guaranteed them between $55 and $58 a barrel.
Some west Texas producers face a second profit-limiting dynamic: They are forced to cut prices because the region’s production is overwhelming its pipeline network, raising transportation costs.
West Texas oil currently trades at a discount of $9 to U.S. benchmark futures, a spread that hit $12 earlier in the month.
Some firms earlier protected themselves from the widening gap with hedges against the discount.
But those that didn’t - and also hedged against future prices at, for instance, at $55 - have been forced to sell barrels at prices in the low-to-mid $40s.
Many firms sold their future output at prices in the $50s last year, hoping to take advantage of short-term rallies to lock in guaranteed income to cover drilling and production costs. Those costs can be $30 a barrel or less in west Texas, allowing the firms a healthy profit even as they protected themselves against future price slumps.