For U.S. shale drillers, the crash in oil prices came with a $26 billion safety net. As Bloomberg reports, that’s how much they stand to get paid on insurance they bought to protect themselves against a bear market—as long as prices stay low.
The flipside is that those who sold the price hedges now have to make good. At the top of the list are the same Wall Street banks that financed the biggest energy boom in U.S. history, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.
While it’s standard practice for them to sell some of that risk to third parties, it’s nearly impossible to identify who exactly is on the hook because there are no rules requiring disclosure of all transactions. The buyers come from groups like hedge funds, airlines, refiners and utilities.
“The folks who were willing to sell it were left holding the bag when prices moved,” John Kilduff, partner at New York-based energy hedge fund Again Capital, tells Bloomberg.
The swift decline in U.S. oil prices—$107.26 on June 20 and $46.39 seven months later—caught market participants by surprise. Harold Hamm, the billionaire founder of Continental Resources Inc., cashed out his company’s protection in October, betting on a rebound. Instead, crude kept falling.
Other companies purchased insurance. The fair value of hedges held by 57 U.S. companies in the Bloomberg Intelligence North America Independent Explorers and Producers index rose to $26 billion as of Dec. 31, a fivefold increase from the end of September, according to data compiled by Bloomberg.
Though it’s difficult to determine who will ultimately lose money on the trades and how much, a handful of drillers do reveal the names of their counterparties, offering a glimpse of how the risk of falling oil prices moved through the financial system.
