December 3, 2016 – December 9, 2016

Bloomberg News
“American Shale Companies’ Rush to Hedge is Turning the Oil Market Upside Down”
Primary Topic – hedging


Hedging, Risk, Options

Summary: Key Points in the Article

North American shale oil producers are hedging sales about two quarters in advance. After the OPEC deal was announced crude oil jumped over $50 a barrel and many producers are taking advantage of the price swing to lock in prices for future delivery. The strategy guarantees they will make a profit for at least six months given the current cost structures.

Many producers were already hedging some production but doubled or tripled down when prices surged higher. For example, Pioneer Natural Resources Co. increased its oil hedges to 75% of production from a previous strategy of hedging 50%. After the OPEC production cut announcement, “a record 580,000 crude options contracts” were traded on the New York Mercantile Exchange in a single day.

Topics for Discussion

  1. How can oil producers hedge using options contracts?
  2. Why did the hedging activity suddenly increase?
  3. What are the advantages of hedging commodity sales?

Multiple Choice Questions

  1. A firm can lock in a price to buy an asset using;
    1. call options
    2. put options
    3. both puts and calls
    4. none of these
  2. Hedging ___________ risk to the firm employing the hedging strategy.
    1. reduces
    2. increases
    3. has no impact on
    4. none of these
  3. The hedging activity of oil producers appears to be for about ___________ in advance.
    1. six months
    2. one year
    3. two years
    4. none of these