Now this is why crude hedges become a speculative instrument - TopicsExpress

Now this is why crude hedges become a speculative instrument instead of a risk mitigating tool: Continental Resources a leading shale oil producer in US had taken hedges for 2015 and 2016 to sell oil in those future years at a predetermined rate today of more than 100 USD per barrel. As the US crude prices have fallen to less than 75 USD per barrel, those hedges became very profitable. The intentional purpose of hedge is to make sure that you are insulated against price variations. But Continental decided to encash today believing that the prices of oil will rise later and made USD 433 Million profits now. The problem is if the oil prices fall down further from here, Continental will have to sell at then current market prices instead of selling at comfortable guaranteed prices of more than 100 USD per barrel. The Hedge protection is gone. And it could literally cost many times more if has to bear the full force of markets. Continental is a resources company not a finance company. Hedges are safety devices not profit instruments. Just because there is a financial opportunity arising it does not mean it had to be taken. And this misuse is why derivatives became such maligned instruments. albertaoilmagazine/2014/11/doubling/

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