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Oil Price Hedging Cost Billions to US Drillers           

ConocoPhillips warned a month ago that its purchase of Concho Resources and related Oil Price hedges would result in a $600-million impairment to first-quarter earnings, according to Reuters. It’s now becoming clear that Concho isn’t the only one who hedged too soon.

As crude Oil Price started to rebound last year after a disastrous first half, US oil producers began to hedge their production for 2021 at higher prices. In an October survey, Rystad Energy noted that they hedged less than normal, at 41 percent of their expected output in 2021. However, they hedged this at $42 per barrel of oil. Rystad’s study shows, the bottom hedging price for 2020 production is $56 per barrel. Then prices rose, but it appears that many oil producers are continuing to hedge at low prices until 2021.

According to Reuters, U.S. oil firms are now facing billions in lost opportunity losses as a result of this excessively pessimistic hedging. According to the survey, Andrew McConn, the co-head of commercial intelligence of energy data at Enverus, 66 oil producers have accumulated missed opportunity losses of up to $7 billion in the first quarter of this year.

In late 2020 and early 2021, hedging at about $40 per barrel was evident. Despite the OPEC+ output cut agreement, uncertainty about oil demand has remained strong, as global Covid-19 infection rates have remained high and are rapidly increasing. This ambiguity is still there. Because of an increase in infections in India, Oil Price have recently fallen. However, it appears that many American oil firms overestimated this uncertainty and the threats it posed to their oil production in retrospect.

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