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AS U.S. CRUDE OIL GOES GLOBAL, HEDGING GOES LOCAL
11/7/2019 12:00:00 AM

The booming U.S. oil sector is seeing a surge in hedging by producers against drops in regional crude prices to protect revenues from oil sold out of Midland, Texas, or delivered to terminals in Houston after relying for decades on global benchmarks.

The U.S. oil trading market has developed enough liquidity to support new financial instruments to guard against unexpected shifts in local prices, due to pipeline outages or a sudden drop in exports that can ripple through regional crude markets.

Prior to the end of a four-decade crude export ban, most U.S. crude oil that was not used domestically was sent through Cushing, Oklahoma, the delivery point for U.S. West Texas Intermediate futures (WTI) CLc1.

Now, buyers and sellers are increasingly looking at other points of delivery for pricing, particularly Houston, now that the country sends more than 3 million barrels of oil overseas daily.

An oil basis swap is a derivative contract that fixes the price difference between two sales points for specified crude volumes over a particular time period. Several other shale producers already use basis swaps for the spread between WTI in Midland, Texas and WTI Cushing, regulatory filings show.

With a slate of new pipelines coming online in the United States thanks to the shale boom, more midstream companies are now using niche hedging strategies as well, dealers and analysts said.

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