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 A number of airlines moved last week to place significant oil price
hedges for 2017, 2018 and even 2019, according to three trading
sources familiar with money flows. They declined to specify
companies, but said it was the largest flurry of such activity in
more than a year.
A fourth trading source indicated that bigger trades occurred in the
over the counter market last week. While still small relative to
previous years, when some carriers hedged as much as 40 percent of
their fuel costs, the recent activity was robust and included larger
players, the source added.
The renewed interest suggests that airlines executives who were
stung by billions of dollars in hedging-related losses last year are
more confident that they're buying at the bottom, a further sign of
shifting sentiment in the oil market after an over 60-percent price
slump since mid-2014.
Big oil consumers are coming around to the idea that "we're not
going to see too many more legs down" in prices, said Steve Sinos,
vice president at consultancy Mercatus Energy, which advises
corporations including airlines on hedging strategies.
Their clients are "getting comfortable with the idea that this is a
good price if not the best price."
The activity has helped buoy so-called longer-dated oil prices, with
December 2017 and 2018 U.S. crude futures enjoying their most
sustained rally since prices began tumbling in the second half of
2014. Selling pressure has resumed in recent days amid concerns that
a promise among major global oil producers to 'freeze' output was in
danger of falling apart.
The number of clients calling Mercatus for advice has increased
lately compared to six months ago, when prices were also in
free-fall but companies were less certain that they had seen the end
of a historic price rout.
ONCE BITTEN...
To be sure, airlines - which typically hedge some volume every
quarter - have a mixed record of calling the market's turning
points. Consultants say airlines are more cautious now after some
past hedges turned out costly because the contracted fuel costs
proved higher than market prices.
Last summer, as oil prices appeared to be stabilizing at around $60
a barrel, Southwest Airlines Co and United Continental Holdings Inc
said they had added new hedges against a rise in oil prices, but
appeared to regret the decision after further losses. (Graphic:
http://tmsnrt.rs/1VutfIc)
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A spokesman for Southwest, the largest hedger among U.S. airlines,
said last week that it actively participated in fuel hedging and has
not changed its overall philosophy. Early this year, with spot oil
prices below $30 a barrel, it estimated a paper loss of $1.8 billion
on its outstanding hedges through 2018.
Delta Air Lines Inc earlier said it exited hedge contracts for 2016
at a cost of $100 million to $200 million per quarter. The company
did not respond to a request for comment.
United Continental Holdings Inc, which said in January that it
stopped any new hedging last July and was evaluating its hedging
program structure, also did not respond to requests for comment.
The return of consumers marks a change of pace for oil markets after
several successive waves of hedging by oil producers who have
scrambled to lock in profits on future output, piling pressure onto
long-term prices.
"Consumers have been absent from the market for a while, so that's
why the back end of the curve has been so weak," said John Saucer,
vice president of research and analysis at Mobius Risk Group in
Houston. "They're (now) buying - and that's positive for fixed
price."
Some 15 million barrels in Brent and WTI crude financial call
options traded last week in the over the counter market, nearly
one-third more than the previous week, according to Depository Trust
& Clearing Corp swaps data available via Thomson Reuters Eikon.
While the data does not indicate parties involved, two traders say
that some of the trades were unusual because of its large volume.
(Reporting By Catherine Ngai; Editing by Jonathan Leff and Tomasz
Janowski)
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