Hedging gains reversed for many producers in 2021 as oil prices stabilize

An average of 1.5 million bbl/d were hedged by North American oil producers heading into 2021 in fixed swaps, collars and three-way collars, according to a new Evaluate Energy report on hedging activity and the extent to which companies gained or lost out as per-barrel values stabilised.

“This time last year, it was upstream hedging strategies – particularly longer-term derivatives in place at the end of 2019 – that protected certain North American oil producers,” said Mark Young, report co-author and senior analyst at Evaluate Energy.

“Hedging provided a much-needed glimmer of positivity for North America’s oil producing industry last year. More than $7 billion was raised in realized hedging gains from settled derivatives in 2020 by the companies we analysed. This translates to a 11% boost in E&P revenues for the group over the entire year.

“Based on more recent hedging data, to say the picture has altered in early 2021 feels like a dramatic understatement. Focus has shifted to producers that have hedged to the point where they are missing out on gains from early 2021 price increases.

“It is hard to criticise any producer that was more cautious when it came to hedging heading into the new year. Instead of gambling on exposure to fluctuating oil prices, the chaos of last year plainly made it a priority for many producers to lock in oil volumes even at new lower market prices via hedging. This provides greater certainty and stability around cash flow for internal budgeting processes.”

A total of 72 producers were analysed by Evaluate Energy.

Among the report findings:

• Certain producers missed out on large short-term gains in early 2021 as oil prices rose significantly;
• Oil volumes hedged by these producers fell by just over 400,000 bbl/d overall, but volumes covered by traditional fixed swap and collar derivatives increased over pre-pandemic levels; and
• Many likely lost out by holding more complex three-way collars in 2020 compared to other derivative types; these types of hedging positions have been significantly cut in 2021.