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U.S. shale firms snap up $50 oil hedges, risking rally reversal

A pump jack is seen at sunrise near Bakersfield, California October 14, 2014.

Welcome to the oil market’s new vicious cycle.

This past week, as oil prices barreled over 9 percent higher to break out of a weeks-long trading range, U.S. shale producers jumped at the chance to lock in $50-plus crude for the first time in months, making up for lost time after holding off hedging during the market's late-summer slump.

U.S. crude oil futures for December 2016 delivery, a favored contract for hedgers, saw trading volume spike to a weekly record high of nearly 190 million barrels, twice as much as the average for the previous four weeks, in what market sources and industry executives said was the biggest wave of hedging since a fleeting rush in late August.

The price premium for the Dec 2016 contract against the same month in 2015 has shrunk to just $4 a barrel, down from more than $7 a barrel two months ago, due partly to forward selling.

Oil producers' rapid response to the latest move upward comes in contrast to the second quarter, when a moderate price recovery was met with only modest hedging interest as many executives bet - wrongly - that the worst was already behind them.

It also highlights the far more precarious financial position for many shale firms facing rapidly tightening credit conditions, expiring legacy hedges and a deepening fear that prices may stay much lower for much longer than they thought.

For some, hedging is now less an insurance...


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