NEW YORK/HOUSTON (Reuters) - Unusually large volumes in the U.S. crude futures market just before noon on Thursday, amounting to around 8 million barrels of oil, revived speculation among traders that cash-strapped U.S. producers are unwinding hedges amid the crude price rout.
Just over 8,000 lots of March West Texas Intermediate crude futures traded electronically at 11:55 a.m. EST, according to Reuters Eikon data, with electronic and block volumes totaling 11,500 lots. For most of the other minute intervals during the day, volumes ranged from around 1,000 to 2,000 lots, except for large volumes at settlement.
The big trade in the morning pushed U.S. crude prices up by as much as 54 cents, or 2.02 percent, over the next minute.
At least four trading sources familiar with money flows said that producers have been looking in recent days to profit from deep in-the-money options previously hedged at higher prices.
Hedging for future production is common among U.S. oil and gas producers, who use it as a lifeline to safeguard future prices. But it has also become more complicated in recent months, dealers say, as it ties up precious cash flow amid one of the worst price slumps in history. The unwinding appears to be beneficial to the producer, but also serves as a last-ditch effort to shore up cash.
It is difficult to pinpoint the buyer, particularly in a liquid front-month contract where big algorithmic trades can sway the market. While the identity of the buyer or buyers is not known, some pointed to distressed producer Linn Energy LLC.
A spokesman for the company declined to comment on market speculation.
The chatter comes a week after traders first said Linn could be unwinding its hedges after it said it was exploring strategic options to shore up its balance sheet.
As of Sept. 30, 2015, the fair value of Linn’s fixed price swaps, put option contracts and three-way collars was a net asset of approximately $1.7 billion, according to a regulatory disclosure.
For 2016, Linn held fixed swap contracts accounting for nearly 11.5 million oil barrels hedged at an average price of $90.56 a barrel, and 4.8 million barrels hedged for 2017 at a price of $89.02 a barrel.
Based on its most recently published production results, the 2016 hedges would account for half of its total production.
The company also held put contracts accounting for 3.3 million barrels of oil with a strike price of $90 for 2016, and contracts accounting for 384 million barrels of oil, also at $90 a barrel.
Liquidating the hedges could offer a quick rush of cash for the company, which last week disclosed it was awarding its top six executives incentive pay totaling roughly $15 million dollars.
On Thursday, Linn shares closed at $0.3692, down 5.8 percent. Prior to the oil price bust, Linn shares were around $30.
Reporting by Catherine Ngai in New York and Liz Hampton in Houston; Editing by Terry Wade and Matthew Lewis