Diamondback Bets on Wider WTI-Brent Gap amid US Export Ban Concerns
Diamondback Energy, a U.S. oil producer, bought options in order to sell the difference between U.S. West Texas Intermediate crude and Brent crude, traded globally, at around minus 42 dollars a barrel, over the next few months. This was a bet which 'could payoff if the United States bans oil exports.
The unusual hedge shows how oil companies are trying to protect their revenue and costs as the Iran War has caused huge price fluctuations that could change the financial fates of producers.
Oil companies use hedges, the oil industry's version income insurance, to protect themselves from falling prices and ensure revenues. Diamondback's hedge is unique among producers. It bets on the difference between two benchmark prices.
Diamondback, a top Permian-only producer, purchased put options worth nearly $70m to sell the price spread between WTI Brent in the second quarter 2026 for up to 255,000 b/d at minus 41.67 a barrel, and?upto 290,000 b/d at minus 42.76 a barrel, in the third quarter.
The spread between WTI Brent traded at minus $9.29 per barrel on Friday. The spread between WTI and Brent traded at minus $9.29 a barrel on Friday.
If the U.S. banned exports, this would increase domestic inventories as U.S. refining plants typically process less crude oil than is produced within the country. This would lower WTI prices, and increase the discount between WTI and Brent.
WTI traded up to $28.07 under Brent in 2011, just before the U.S. lifted its oil export ban. The spread would be even wider if the exports are banned today, as the production of the country has increased.
The Trump administration has stated that it will not ban the export of oil. California's Democratic Congressman Brad Sherman, however, introduced a bill on Thursday that sought to stop the exports of U.S. produced oil during?the?war with Iran.
In 2015, the U.S. lifted its 40-year ban against crude oil exports and is now the world's top producer with a daily output of 13,6 million barrels. The demand for American oil is surging globally. Last week, the country became a net oil exporter for the first since World War Two. This was due to the Iran War leaving Asian and European refiners scrambling to find supplies.
Tim Skirrow is the head of derivatives for Energy?Aspects.
Skirrow explained that "as a producer they would be heavily affected by a decline of this magnitude in WTI... So, this expression helps to hedge their outcome on top of the regular hedging of WTI price," he said.
Diamondback has declined to comment on the matter and has not made public the reasons for the hedge.
In the first quarter of this year, oil production was averaging?around 521,000 barges per day. Revenues totaled $4 billion. The company also reported a net gain of $117 million on its derivatives.
PAYOFF FOR EXPORT BAN
If WTI trades at a price that is $42 below Brent, Diamondback's options would be profitable. If WTI was to drop to a $50 price discount, then the company could make $8.33 per barrel, or $190 million in the second quarter.
Diamondback will lose out on the $1.24 and $1.52 per barrel premiums they paid to lock in their options if WTI's price discount to Brent doesn't increase by more than $42 a barrel during the period.
The company used basis puts for the first time in 2022. This is a financial instrument that hedges the price difference between two contracts, such as the U.S. oil benchmarks and the global benchmarks. Exports were not prohibited in 2022 but were viewed as a risk by the government at the time due to the Russia-Ukraine conflict that drove gas prices up. In a normal market scenario, the chances of these investments paying off are very, very small. Skirrow said that if an export ban is imposed with midterm elections approaching, there's a good chance it will pay out.
Skirrow added that he expected the premium to be about 20 cents per barrel, given the current WTI/Brent prices. Reporting by Arathy S. Somasekhar, Houston; editing by Chizu N. Nomiyama
(source: Reuters)
