Diamondback Energy has bought options that would profit if the price gap between U.S. West Texas Intermediate crude and international Brent crude widens sharply, according to the company’s quarterly filings. The contracts are structured as put options on the WTI-Brent spread with strike levels clustered around minus $42 a barrel in upcoming quarters.
Specifically, Diamondback paid for options to sell the spread at minus $41.67 a barrel for up to 255,000 barrels per day in the second quarter of 2026, and at minus $42.76 a barrel for up to 290,000 barrels per day in the third quarter. The total premium paid for the positions is nearly $70 million, the filing shows.
At the time the filing was reported, the WTI-Brent spread was trading at minus $9.29 a barrel. The spread had widened to as much as minus $20.69 in March when market participants grew concerned that the U.S. government might move to halt crude exports as a mechanism to lower domestic gasoline prices. Those worries and the resulting price volatility have prompted producers to explore unconventional hedges to protect cash flows.
How the hedge works
The options bet is a form of basis hedge. Diamondback’s positions profit only if WTI weakens substantially relative to Brent - that is, if the discount on U.S. crude deepens toward the levels specified in the contracts. If the spread reaches about $42 in favor of Brent, Diamondback’s puts would be in the money and generate proceeds that offset part of the revenue loss from lower domestic crude prices.
The filing illustrates potential payoffs and losses. If WTI were to trade roughly $50 below Brent during the second quarter, Diamondback’s hedge would deliver around $8.33 per barrel on the position, which the company estimates would translate to roughly $190 million in gains for that quarter alone. Conversely, if the spread does not widen beyond the strike levels, the firm would forfeit the premiums paid - about $1.24 per barrel in the second quarter and about $1.52 per barrel in the third quarter - totaling the near $70 million outlay to secure the options.
Why a widening spread could happen
Market participants say a U.S. crude export ban would likely force more oil to remain in domestic storage because U.S. refiners typically process less domestic crude than the country produces. That accumulation of inventory would depress WTI relative to Brent, widening the discount. In previous episodes, when exports were restricted, WTI has traded well below Brent. The spread reached as much as $28.07 below Brent in 2011, before the United States lifted a previously imposed export ban.
The U.S. lifted a 40-year ban on crude exports in 2015 and has since grown into the world’s largest producer, with output of 13.6 million barrels per day. Recent geopolitical developments tied to the Iran war have tightened global supply and pushed buyers toward American crude. Last week, the U.S. became a net exporter of oil for the first time since World War Two as Asian and European refiners sought alternative supplies.
Industry perspectives and company context
Tim Skirrow, head of derivatives at Energy Aspects, framed the hedge as a protection against the specific risk of an export ban. "The way that we can make sense of that is the risk of a U.S. crude export ban, which would have the effect of decreasing U.S. crude prices a lot versus global benchmarks such as Brent," he said. "As a producer, they’d be very heavily impacted by a drop of that magnitude in WTI... so this expression helps them to hedge that outcome, on top of their regular hedging in WTI price."
Skirrow also noted the costliness of the premium paid by Diamondback. He said the more than $1 per barrel premium is "extremely high given where WTI-Brent are currently trading," and that typical premiums might be about 20 cents a barrel.
Diamondback did not provide comment explaining its rationale in public filings. The filing does disclose that the company averaged oil production of around 521,000 barrels per day in the first quarter and recorded $4.2 billion in revenues for the period. The company also reported a $117 million net gain tied to its derivatives positions in that quarter.
Political backdrop
Despite speculation, the Trump administration has publicly said it would not ban oil exports. Nonetheless, political developments continue to introduce uncertainty. California Democratic Congressman Brad Sherman introduced legislation seeking to halt exports of U.S.-produced oil during the Iran war, an action that underlined the political risk that market participants are pricing into hedges such as Diamondback’s basis puts.
The company’s recent use of basis puts marks its first deployment of this specific tool since 2022. At that time, export restrictions were again being discussed as gasoline prices rose amid the Russia-Ukraine war, although an outright ban was not implemented.
What is at stake
For a Permian Basin-focused producer like Diamondback, a sharp decline in WTI relative to global prices could meaningfully reduce revenue unless offset by derivatives or other commercial arrangements. The basis puts provide a targeted insurance policy against just that scenario, albeit at a substantial upfront cost. If the spread remains narrower than the option strikes, the expense will be the premium paid; if the spread widens to the strike levels or beyond, the hedge could offset a significant portion of the producer’s losses from depressed domestic prices.
Market participants and analysts will watch both political developments and physical flows of crude to assess whether the risk priced into these options materializes.