NEW YORK (Reuters) - Oil producers have picked up the pace in hedging against further production in 2019, with an average price at about $60 a barrel, which limits upside but protects against volatility, according to Goldman Sachs.
For 2018, about 48 percent of oil production is hedged at an average price of $57 a barrel, Goldman said in a note late on Monday.
Sixteen percent of 2019 oil production is hedged at $60 a barrel, versus 9 percent at the end of the fourth quarter, in line with the historic average for hedging several quarters in advance.
Oil producers use futures contracts to hedge their exposure to production, in an effort to keep themselves protected from losses should the price of U.S. crude fall suddenly.
Both hedging levels are below current futures contracts prices, which are averaging around $70 for the second half of 2018 and $66 a barrel for 2019. Hedging at lower levels limits the ability of producers to take advantage of a subsequent rally in prices - but it also protects them if the price of oil should fall to lower levels.
That kind of volatile trading pattern was present throughout 2017, so producers remained protected even after oil dropped off from an early-year rally. That in part helped production in the United States continue to grow, eventually rising to an all-time record late in 2017 of more than 10 million barrels a day.
In 2018, oil has been steadily rising, which presents a risk for producers if they hedge at levels below the current price, so some companies elected not to hedge.
“We didn’t leave money on the table by hedging too soon,” said Harold Hamm, chief executive of Continental Resources, on the company’s first quarter conference call earlier this year. The company, one of the largest shale producers in North Dakota, did not have any crude oil hedges as of the end of the first quarter.
Hedging could restrain ramping activity and increase focus on “capital discipline,” Goldman said.
“We believe producers may continue to tactically add oil hedges at current futures to mitigate oil price volatility in 2019, which could support greater capex,” the investment bank said in its note.
It said the majority of production growth in 2018 was expected to come from producers hedged above 50 percent.
Devon Energy Corp and Noble Energy Inc added the most 2018 oil hedging contracts after fourth quarter earnings, the bank said.
Reporting by Stephanie Kelly; Editing by Tom Brown