Where will the price of a barrel of oil go? No one knows for sure. Though we can see what steps market producers take to prepare for price movements.
Pioneer Natural Resources closed nearly all hedges on oil production for the year. What does this mean? Hedges are used across industries and in this case act to protect holders from a decline in oil prices, effectively setting a floor on price drops, while limiting or preventing profits from upward price movements. Pioneer is the largest oil producer in the Texan Permian Basin, and it cost them $328 million dollars to close the hedges. That is serious money, but it pales to the potential profits an increase in the price of oil represents.
The hedging move is a sign that Pioneer believes oil prices will rise in the coming year.
Pioneer is not the only industry mover taking this position. A major Permian Basin rival, Occidental Petroleum, announced in November that it would not hedge its oil production for 2022. While Occidental generally does not hedge, it did pull off one of the largest hedges ever placed by a U.S. energy company in January 2020. The move was designed to preserve a generous dividend after announcing a takeover that represented one of the largest industry deals in years.
While the direction of oil prices may be uncertain, the market knows the outlook of some major producers in the industry. What do you think?
~ Brian Kasal- The Leadership Matrix
Added bonus- a great breakdown of the execution of the Occidental hedge
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