(Bloomberg) -- US oil producers pounced on a chance to lock in prices for future sales as rising tensions between Iran and Israel sent crude soaring earlier this month.
Positioning data indicates that hedging trades jumped when US crude futures surged more than $10 a barrel in about a week to start off October, with traders and brokers also saying they handled a spike in such transactions.
Producers use contracts like swaps and options to guarantee revenue and protect against falls in prices. The most recent surge in hedging came as US crude futures jumped to $78 a barrel just weeks after they had plunged to the lowest prices in almost three years. With the International Energy Agency and other analysts still projecting bearish conditions next year, the spike sent producers clamoring for price protection.
The new hedges give US producers some wiggle room to increase output modestly next year even if prices weaken, potentially adding to the projected oversupply. That could complicate a decision by OPEC and its allies on whether to return some production to the market.
US shale drillers frequently engaged in those trades during the industry’s boom times over the past decade, resulting in bumper derivatives volumes. The practice has since slowed as investors demand more capital discipline from producers and as publicly listed firms were either purchased or went out of business.
AEGIS Hedging — which conducts hedging trades that cover about 25% to 30% of US oil and gas production on a barrels-of-oil-equivalent basis — handled the most trades in its history on Oct. 3, said Jay Stevens, director of market analytics. That day, crude soared more than 5% on speculation Israel might strike Iran’s oil infrastructure.
“It was just wild,” Stevens said. “For multiple days our trading team was super busy. They were deep in the weeds.”
Crude trades for October have already smashed monthly records, he said, adding that producers both large and small have hedged aggressively and locked in prices that they felt they had missed out on, Stevens added.
In one sign of the scale of the hedging outburst, swap dealers increased their short positions in US crude futures and options by 54,000 contracts last week, the most since 2017 and the third-largest gain on record. The gauge is considered an indication that entities like banks, who are often a party to the hedging trades, are attempting to disperse their risk in wider markets.
“Volumes of producer hedging picked up in the wider market when prices rallied,” said Aldo Spanjer, a commodities strategist at BNP Paribas SA. “There definitely was an uptick.”
Conditions in options markets also likely aided the onslaught of producer hedging. Bearish put options had been trading at significant discounts to bullish calls in recent weeks as speculators sought protect against a spike in prices. That setup can make hedging attractive for producers who buy put options and sell calls.
Hedging activity may now have hit a pause amid ebbing concerns that Israel will attack Iranian oil infrastructure. Producers may be interested in hedging more if prices rally toward $80 a barrel again, market participants said.
(Updates with market context in fourth paragraph)
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