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Thursday, May 26, 2022

Rising cost of oil hedges jeopardizes deliveries

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(Bloomberg) — Hedging oil is getting more expensive and time consuming as liquidity tightens in the futures market, slowing trading and threatening to disrupt real-world deliveries if things don’t improve. .

Some hedging deals that used to take four to six weeks now took three months or more, said a person who runs hedging for shale producers. At the same time, the cost to hedge producers to act as insurance against a sudden price collapse has recently appeared as high as 50%.

“It now costs 25% more on average to hedge using banks and 50% more if you use a carrier, so the cost of execution has been quite noticeable,” said Jay Stevens, vice president of AEGIS Hedging Solutions which works with about 250 Oil and gas producers in their hedging programs. “It’s still worth doing the coverage, but we definitely have producers that aren’t happy about it.”

Rising costs and longer lead times to secure hedges are just the latest headache for an oil market already struggling with rising margin requirements and extreme volatility, which have driven some speculators, such as hedge funds. Since most traders will not move physical barrels without a corresponding financial trade to help minimize risk, these mismatches in the financial trading space present the risk of spilling over into physical markets.

Several major physical operators have already said that the fact that the liquidity crisis coincides with limited access to credit lines is driving up costs, forcing them to scale back activity. Cash crude trading in Cushing, Oklahoma, the delivery point for benchmark futures, is likely to be more difficult these days due to credit problems, a US physical crude trader said on condition of anonymity as he did not He was authorized to speak to the media.

original note:

Rising Oil Hedging Costs are Endangering Real-World Deliveries

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