US drillers buy protection against low oil prices, showing OPEC cuts are ‘backfiring’

U.S. drillers are insulating themselves against falling oil prices — a move that could prolong the global crude glut that the Organization of the Petroleum Exporting Countries is trying to drain. American companies rushed to lock in higher prices for future deliveries of oil as the market recovered late last year, analysis of company disclosures by consultancy group Wood Mackenzie shows. That threatens to keep oil flowing from U.S. fields throughout 2017, even if prices fall. It’s another sign that U.S. drillers are making it harder for OPEC and 11 other exporting nations, including Russia, to reduce huge stockpiles of crude through coordinated production cuts. “This is looking like a complete backfiring on OPEC and what they were trying to do,” said John Kilduff, founding partner at energy hedge fund Again Capital. Prices rebounded above $50 a barrel late last year as producing nations prepared to cut their combined output by 1.8 million barrels a day for the first half of 2017. But the higher prices not only made more U.S. production profitable, it also gave drillers the opportunity to hedge their production. Hedging involves buying financial instruments that give producers the option to sell their oil at an agreed-upon future price. When the market falters, drillers can exercise those options to collect a higher price than markets are giving. The practice also helps drillers fund new exploration and production without borrowing too much, which in turn helps them meet their output targets.