Some oil producers have a secret weapon in times of crisis :: Investor.bg

Photo: Bloomberg

Not all oil companies are the same when it comes to price collapse damage. Some companies and major domestic producers around the world have purchased insurance in the form of hedging strategies for such a collapse in oil prices, writes the Wall Street Journal.

This hedging toolkit allows some companies such as the US Hess Corporation and British Cairn Energy PLC and countries, including Mexico, to continue to sell their oil at significantly higher prices when listed on West Texas Intermediate (WTI) and other global oil companies. The varieties are in a free fall situation.

Coverage is not a cure for pain. It is complicated and expensive, but for some strategies it provides some comfort in the short term.

Hedging contracts set the price of a certain volume of oil that the company plans to deliver within a specified period, often after three full years from the date of the contract. If market prices fall below the agreed price, the bank or other hedging counterparty agrees to cover the difference.

This can be a risky chess move, as hedges (a person or company planning to own an asset, looking to control the risk of a price change, be aware) are paying banks and oil companies to Isolate your prices from fluctuations. in the market, and they can lose money when prices go up.

While the Saudi Arabian Petroleum Exporting Countries (OPEC) have concluded a landmark agreement with Russia, the US USA And other major oil powers, Mexico nearly failed the deal, opposing the cartel’s requests to urgently curb production.

Unlike other negotiating countries, Mexico is benefiting from the direction in which oil prices move during the pandemic.

Under the agreement, Riyadh, Moscow and Washington agree to lead the coalition to maintain a cut in oil production of 13% of global supply. Mexico finally decided to join after a phone conversation between the country’s president and Donald Trump. However, the pact failed to balance the market, fueling prices, as the coronavirus pandemic continues to stifle demand.

Last week, Monday, the futures contracts for the delivery of US oil. USA Operations in negative territory ended in May, less $ 37.63 per barrel.

In effect, this meant that sellers had to pay buyers to sell them excess amounts.