Publications: Notes at the Margin

Hedging, Negative Oil Prices, and the US Supply Response (June 29, 2020)


Producer hedging has made oil prices more volatile, especially when prices fall below critical levels. Large amounts of hedging can lead to negative prices in cash-settled contracts. As an alternative, US oil producers have reacted to low prices by cutting production. Eighty-two percent of the exploration and production firms surveyed by the Dallas Federal Reserve Bank recently reported that they had shut in or curtailed production in the second quarter. The result was an output decline estimated by PKVerleger LLC of more than four million barrels per day. Estimated supply for the week ending June 19, however, showed an increase of 1.1 million barrels per day, that is, the return of twenty-five percent of the supply shut in during that quarter.


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