Monday, July 7, 2008
Saturday, July 5, 2008
Prices Still Rising
MUMBAI: Crude oil continues to be the hot pick for yet another week as the prices made a new high due to geo political situation in Middle East. The most traded August contract at New York Mercantile Exchange moved up by 3.6% since last week and made a high of $145.85 per barrel before closing down at $145.29. In London the Brent crude futures on ICE futures exchange moved up by almost 2.9% since previous week and made a high of $146.69 per barrel. Locally on MCX the July contract moved up by 3.11% and made a high of Rs 6,298 per barrel before closing down at Rs 6,228. Concerns that Israel may attack Iran’s nuclear installations which could cut 40% of the crude oil supplies to the world pushed up the prices. However crude oil fell from near a record as Iran said it gave a “constructive” response to incentives intended to persuade the nation to stop uranium enrichment. Incentives were offered by six world powers — United States, China, Russia, Germany, Britain and France in June in a bid to resolve a dispute over Tehran’s nuclear plans which they fear could result in nuclear bomb. Also the US crude oil inventories fell much more than expected last week on higher demand from domestic refiners and a drop in imports. Commercial stockpiles of crude oil in the United States decreased 2 million barrels to 299.8 million barrels according to the Energy Information Administration. According to an Anand Rathi report geo Political events will be the key driving factor for crude oil prices in coming days. Inventories will also be a critical issue which will determine the pace of trend of crude oil. Crude oil inventories have fallen to three years low due to lesser refinery utilisation. Subodh Gupta from Anand Rathi commodities said, “We expect crude oil markets to continue trading higher with a potential target of $148- $149. Also $150 seems to be a very strong psychological level and we do not expect this to be broken soon,” . He added that on a downside $142.30 can be a critical support. “Breach of this will lead to $138/barrel,” Mr Gupta said.
G8 Concerns
Tokyo, July 4 (Jiji Press)--The top leaders of the Group of Eight major countries will express strong concerns over skyrocketing crude oil prices at their annual meeting in Hokkaido next week, Jiji Press learned on Friday.
In a statement to be adopted at the three-day summit from Monday, the eight leaders will use powerful language similar to the "serious concerns" voiced by G-8 energy ministers at their meeting last month.
The G-8 leaders will call for greater transparency in the crude oil market through stepped-up information disclosure and clarify their support for moves by market regulators to enhance their monitoring of speculative activities.
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At the summit, the leaders will discuss how to simultaneously cope with the ongoing global economic slowdown, prompted by the U.S. subprime mortgage loan crisis, and inflation stemming from high oil and other commodity prices.
The leaders will ask oil-producing countries to increase output and enhance refining capacity, while calling for additional efforts to curb oil consumption through greater use of energy-saving technologies and alternative energy sources.
As specific measures to make crude oil trading more transparent, the leaders will vow to improve data on oil stockpiles and demand in major consumer countries and consider requesting producer countries to unveil medium-term investment plans.
The statement will note the importance of adjusting the supply- demand balance through market mechanisms, and urge countries that use subsidies to stabilize domestic oil prices to change the policy.
On the financial aspects of the oil issue, the statement will voice expectations for analysis by international organizations including the International Monetary Fund on the reasons for crude oil's record-breaking surge. The G-8 leaders will also welcome U.S. efforts to monitor oil market activities.END
(c) 2008 Jiji Press English News Service. Provided by ProQuest Information and Learning. All rights Reserved.
In a statement to be adopted at the three-day summit from Monday, the eight leaders will use powerful language similar to the "serious concerns" voiced by G-8 energy ministers at their meeting last month.
The G-8 leaders will call for greater transparency in the crude oil market through stepped-up information disclosure and clarify their support for moves by market regulators to enhance their monitoring of speculative activities.
GA_googleFillSlotWithSize("ca-pub-5440138744487553", "News_Main_300x250", 300, 250);
At the summit, the leaders will discuss how to simultaneously cope with the ongoing global economic slowdown, prompted by the U.S. subprime mortgage loan crisis, and inflation stemming from high oil and other commodity prices.
The leaders will ask oil-producing countries to increase output and enhance refining capacity, while calling for additional efforts to curb oil consumption through greater use of energy-saving technologies and alternative energy sources.
As specific measures to make crude oil trading more transparent, the leaders will vow to improve data on oil stockpiles and demand in major consumer countries and consider requesting producer countries to unveil medium-term investment plans.
The statement will note the importance of adjusting the supply- demand balance through market mechanisms, and urge countries that use subsidies to stabilize domestic oil prices to change the policy.
On the financial aspects of the oil issue, the statement will voice expectations for analysis by international organizations including the International Monetary Fund on the reasons for crude oil's record-breaking surge. The G-8 leaders will also welcome U.S. efforts to monitor oil market activities.END
(c) 2008 Jiji Press English News Service. Provided by ProQuest Information and Learning. All rights Reserved.
Tuesday, July 1, 2008
Southwest Airlines Oil Hedging
Airlines try to hedge against soaring fuel costs
By DAVID KOENIG – 16 hours ago
DALLAS (AP) — The computer screen on Scott Topping's desk at Southwest Airlines flickered with row after row of dates and numbers, but they had nothing to do with arrivals and departures.
They tracked the price of oil futures for the next several months, and they told a grim tale: No letup in sight from record prices for jet fuel.
"We're on a one-way street right now," Topping said as he hunched over the screen, shaking his head.
It's Topping's job to oversee Southwest's battle to control surging fuel costs. It is the most successful program of its kind in the airline industry.
In the first quarter of this year, Southwest paid $1.98 per gallon for fuel. American Airlines paid $2.73, and United paid $2.83 per gallon in the same period.
Since 1999, hedging has saved Southwest $3.5 billion. It has sometimes meant the difference between profit and loss. In the first quarter, hedging gains of $291 million dwarfed Southwest's $34 million profit.
Hedging is a financial strategy that lets airlines or other investors protect themselves against rising prices for commodities such as oil by locking in a price for fuel. It has been described as everything from gambling to buying insurance.
Airlines can hedge in several ways, making financial transactions with banks, energy companies or other trading partners.
They can buy contracts for crude oil or unleaded gasoline, and reap a gain if prices rise, offsetting the higher cost of jet fuel.
They can buy a "call option" that gives them the right to buy fuel at a certain price.
They can also use collar hedges, a combination of rights to buy and sell at set prices ("call" and "put" options). Collars provide protection from a decline in prices but less upside if prices rise.
Airlines also use swaps, contracts that require them to buy oil or fuel on a certain date at a set price. These are risky — one party in a swap wins, the other loses.
Most airlines use a combination of strategies to reduce risk.
The transactions carry a price tag. Southwest spent $52 million on hedging premiums last year and $14 million in the first three months of this year.
As a result mostly of trades made years ago, Southwest has hedged 70 percent of this year's fuel needs at $51 per barrel instead of the current price of more than $140 per barrel.
But hedging premiums rise and fall with the price of the underlying commodity, making new trades very expensive. Southwest has not done much trading in the last several months.
Airline executives say hedging is not a bet on the direction of oil prices.
"We view our program as insurance," said Paul Jacobson, the treasurer of Delta Air Lines Inc. "Our goal is to minimize the volatility of fuel expenses. To do that, you've got to be in the market actively without an opinion as to what energy prices will do."
But hedging carries risks. Airlines can lose money if oil prices turn down and their options expire.
In 2006, Delta won approval from a bankruptcy court and creditors to get into hedging. But the airline got squeezed when oil prices dropped in midyear, and it reported a loss of $108 million from the trading.
Continental Airlines Inc. reported a loss of $18 million from hedging in the first quarter of 2007. But like Delta, Continental is still hedging.
At one time in the 1990s, most major U.S. airlines hedged some of their fuel costs — even hiring experts from the oil industry to show them the ropes — said Peter Fusaro, chairman of Global Change Associates, an adviser to hedge funds.
That changed after the recession and terror attacks of 2001, which plunged airlines into huge losses. Banks and energy companies that make hedging trades with airlines grew nervous.
"The problem was that most carriers had terrible creditworthiness and couldn't hedge," Fusaro said. "Counter-parties feared the carriers would renege on their trades."
Southwest was the only large U.S. carrier to remain profitable through the downturn. It benefited from higher labor productivity and lower ticket-sales costs. That, and a healthy balance sheet, allowed it to keep hedging when oil was a bargain, compared to today's prices.
Now, Southwest is the only big carrier that has most of its fuel expenses hedged at below-market prices. And analysts say it will be the only one to earn a profit this year.
While other carriers plan to slash flights later this year — some contracting by more than 10 percent — Southwest expects to grow, although more slowly than it would like.
And Southwest has avoided the kind of fees that annoy passengers. It doesn't charge for checking luggage or buying a ticket over the phone, doesn't add a fuel surcharge to the fare, and still gives out free sodas and snacks.
But how long will the joy ride last?
The bulk of Southwest's hedges expire gradually by 2012. Replacing them would be very expensive and risky. One plan under study is to go back to hedging only against catastrophically higher oil prices — say, $200 per barrel.
Unless oil prices stabilize or even decline, the airline could face a crisis covering higher fuel costs in just a few years.
"It's starting to have an impact on their operating plan," said Betsy Snyder, an analyst for the debt-rating service Standard & Poor's. "They're cutting back growth plans for the first time ever and exiting some unprofitable routes."
Chairman and Chief Executive Gary Kelly said the fuel hedges have bought his airline time to adjust to higher energy costs. Now he wants to find $1.5 billion in new revenue to make up for shrinking fuel hedges.
Among possible sources of the money are higher fares, international service, in-flight entertainment for a charge, and selling hotel rooms on its Web site.
Snyder thinks Southwest can pull it off by following its current strategy of expansion in places like Denver, Philadelphia and Baltimore, where rivals are cutting flights.
"This is a company," Snyder said, "that has always taken advantage of others' misfortune."
By DAVID KOENIG – 16 hours ago
DALLAS (AP) — The computer screen on Scott Topping's desk at Southwest Airlines flickered with row after row of dates and numbers, but they had nothing to do with arrivals and departures.
They tracked the price of oil futures for the next several months, and they told a grim tale: No letup in sight from record prices for jet fuel.
"We're on a one-way street right now," Topping said as he hunched over the screen, shaking his head.
It's Topping's job to oversee Southwest's battle to control surging fuel costs. It is the most successful program of its kind in the airline industry.
In the first quarter of this year, Southwest paid $1.98 per gallon for fuel. American Airlines paid $2.73, and United paid $2.83 per gallon in the same period.
Since 1999, hedging has saved Southwest $3.5 billion. It has sometimes meant the difference between profit and loss. In the first quarter, hedging gains of $291 million dwarfed Southwest's $34 million profit.
Hedging is a financial strategy that lets airlines or other investors protect themselves against rising prices for commodities such as oil by locking in a price for fuel. It has been described as everything from gambling to buying insurance.
Airlines can hedge in several ways, making financial transactions with banks, energy companies or other trading partners.
They can buy contracts for crude oil or unleaded gasoline, and reap a gain if prices rise, offsetting the higher cost of jet fuel.
They can buy a "call option" that gives them the right to buy fuel at a certain price.
They can also use collar hedges, a combination of rights to buy and sell at set prices ("call" and "put" options). Collars provide protection from a decline in prices but less upside if prices rise.
Airlines also use swaps, contracts that require them to buy oil or fuel on a certain date at a set price. These are risky — one party in a swap wins, the other loses.
Most airlines use a combination of strategies to reduce risk.
The transactions carry a price tag. Southwest spent $52 million on hedging premiums last year and $14 million in the first three months of this year.
As a result mostly of trades made years ago, Southwest has hedged 70 percent of this year's fuel needs at $51 per barrel instead of the current price of more than $140 per barrel.
But hedging premiums rise and fall with the price of the underlying commodity, making new trades very expensive. Southwest has not done much trading in the last several months.
Airline executives say hedging is not a bet on the direction of oil prices.
"We view our program as insurance," said Paul Jacobson, the treasurer of Delta Air Lines Inc. "Our goal is to minimize the volatility of fuel expenses. To do that, you've got to be in the market actively without an opinion as to what energy prices will do."
But hedging carries risks. Airlines can lose money if oil prices turn down and their options expire.
In 2006, Delta won approval from a bankruptcy court and creditors to get into hedging. But the airline got squeezed when oil prices dropped in midyear, and it reported a loss of $108 million from the trading.
Continental Airlines Inc. reported a loss of $18 million from hedging in the first quarter of 2007. But like Delta, Continental is still hedging.
At one time in the 1990s, most major U.S. airlines hedged some of their fuel costs — even hiring experts from the oil industry to show them the ropes — said Peter Fusaro, chairman of Global Change Associates, an adviser to hedge funds.
That changed after the recession and terror attacks of 2001, which plunged airlines into huge losses. Banks and energy companies that make hedging trades with airlines grew nervous.
"The problem was that most carriers had terrible creditworthiness and couldn't hedge," Fusaro said. "Counter-parties feared the carriers would renege on their trades."
Southwest was the only large U.S. carrier to remain profitable through the downturn. It benefited from higher labor productivity and lower ticket-sales costs. That, and a healthy balance sheet, allowed it to keep hedging when oil was a bargain, compared to today's prices.
Now, Southwest is the only big carrier that has most of its fuel expenses hedged at below-market prices. And analysts say it will be the only one to earn a profit this year.
While other carriers plan to slash flights later this year — some contracting by more than 10 percent — Southwest expects to grow, although more slowly than it would like.
And Southwest has avoided the kind of fees that annoy passengers. It doesn't charge for checking luggage or buying a ticket over the phone, doesn't add a fuel surcharge to the fare, and still gives out free sodas and snacks.
But how long will the joy ride last?
The bulk of Southwest's hedges expire gradually by 2012. Replacing them would be very expensive and risky. One plan under study is to go back to hedging only against catastrophically higher oil prices — say, $200 per barrel.
Unless oil prices stabilize or even decline, the airline could face a crisis covering higher fuel costs in just a few years.
"It's starting to have an impact on their operating plan," said Betsy Snyder, an analyst for the debt-rating service Standard & Poor's. "They're cutting back growth plans for the first time ever and exiting some unprofitable routes."
Chairman and Chief Executive Gary Kelly said the fuel hedges have bought his airline time to adjust to higher energy costs. Now he wants to find $1.5 billion in new revenue to make up for shrinking fuel hedges.
Among possible sources of the money are higher fares, international service, in-flight entertainment for a charge, and selling hotel rooms on its Web site.
Snyder thinks Southwest can pull it off by following its current strategy of expansion in places like Denver, Philadelphia and Baltimore, where rivals are cutting flights.
"This is a company," Snyder said, "that has always taken advantage of others' misfortune."
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