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Oil Bounce Creates Tough Hedging Decisions For U.S. Shale Producers

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United States Oil Fund ETF ETF:USO, Pioneer Natural Resources Company NYSE:PXD - Oil Bounce Creates Tough Hedging Decisions For U.S. Shale Producers

The recent surge in oil prices from 13-year lows back in February may have potentially saved a handful of U.S. shale producers, but it has created some difficult hedging decisions for the entire industry.

Oil producers have the option of using hedging to lock in current oil prices for 2017 and beyond. However, at current prices, many shale producers are barely (if at all) breaking even. Hedging at current prices essentially guarantees that they won't be seeing major profits anytime soon.

The flip side, of course, is companies that are hedged will avoid the potential fallout and credit risks associated with another future plunge in oil prices below $30/bbl.

“Given the fragility of market rebalancing, and the financial exhaustion of many U.S. onshore oil producers, the safer course is to start locking in at current prices, even at the risk of giving away some upside,” Reuters oil expert John Kemp argues.

The break-even price for the majority of Eagle Ford shale production, for example, is in the $40-$60/bbl range, which highlights the difficulty of a potential decision to hedge at the current price of around $45/bbl.

The Wall Street Journal reports that, despite the surge in prices, U.S. producers have hedged just 36 percent of their expected 2016 output.

EV Energy Partners, L.P. EVEP 2.65% and Pioneer Natural Resources PXD 0.67% are reportedly among the names that have added to hedges in recent weeks.

Earlier this week, JPMorgan boosted its 2017 Brent crude price forecast from $47.75 to $52.

So far in 2016, the United States Oil Fund LP (ETF) USO 0.71% is up 2.1 percent.

Disclosure: the author holds no position in the stocks mentioned.

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