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Hedging activity spikes as producers lock in higher prices

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US crude futures jump after Israel strikes Iran

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Oil producers need $65 a barrel on average to profitably

drill

By Georgina McCartney

HOUSTON, June 20 (Reuters) - Israel's surprise attack on

Iran last week had oil prices spiking which sent U.S. producers

scrambling to lock in the price gain, driving record hedging

volumes that will help shield them from future price swings.

West Texas Intermediate crude futures rose further

this week, closing on Friday at around $75 a barrel. This

prompted U.S. producers to secure additional price gains through

2026, having already driven hedging activity on the Aegis

Hedging platform to a record high last Friday.

Aegis Hedging, which handles hedging for roughly 25-30% of

U.S. output, according to internal estimates, saw a record

volume and greatest number of trades done on its trading

platform on June 13. The U.S. produces some 13.56 million

barrels per day of oil, according to the latest government

figures.

U.S. crude futures jumped 7% on June 13 to around $73 a

barrel, after Israel struck Iran, the largest single day rise

since July 2022.

Prices had been hovering under where many producers would

opt to hedge, hitting a four-year low of $57 a barrel in May as

OPEC+ started hiking output while U.S. President Donald Trump

waged a trade war. The jump on June 13 gave traders an

opportunity to lock in prices for their barrels not seen in

several weeks.

When prices react to risk-related events - such as

Israel's attack on Iran - as opposed to supply-and-demand

fundamentals, the front of the oil futures curve rises more than

later contracts, influencing whether producers opt for short- or

long-term hedging strategies, according to Aegis Hedging.

"In this case it was probably a six-month effect," said

Matt Marshall, president of Aegis Hedging.

Oil producers need a price of $65 a barrel on average to

profitably drill, according to the first quarter 2025 Dallas

Federal Reserve Survey. U.S. crude futures closed below $65

every day from April 4 to June 9, according to LSEG.

"We stay disciplined and pay close attention to market

volatility. We watch for accretive pricing to our existing

hedges and layer in hedges to reduce risk to our asset revenue

as well as meet our reserve-based lending covenants," said Rhett

Bennett, chief executive at Black Mountain Energy, a producer

with operations in the Permian Basin.

A reserve-based lending covenant refers to a type of loan

producers can obtain, based on the value of the company's oil

and gas reserves.

"Producers recognized that this could be a fleeting issue

and so they saw a price that was above their budget for the

first time in a few months, and instead of doing a structure

that would give them a floor which is below market, they opted

to be aggressive and lock in," said Aegis' Marshall.

Aegis' customers often have hedging policies in which a

certain amount of production must be hedged by a certain time in

the year.

"Producers had two months of hedges that they needed to

catch up on," Aegis' Marshall said.

Traders on June 13 exchanged the most $80 West Texas

Intermediate crude oil call options since January on the Chicago

Mercantile Exchange, expecting more upside to prices.

A total of 33,411 contracts of August-2025 $80 call options

for WTI crude oil were traded that day on a total trading volume

of 681,000 contracts, marking the highest volume for these

options this year, according to CME Group data.