Tag: speculation

$200 oil gets farther away (UPDATED)

When the price of a barrel of crude hit $150 during the summer, every bank on the Street (which after this weekend’s events can now be alternatively referred to as “the Pothole”) was touting the idea that we’d see $200 any moment.

Meanwhile, US consumers starting cutting back on fuel consumption – and their staying away from the shopping malls meant our fine and friendly trading partners were spending less time counting their spare change as well. That, or there are a whole lot of evil budding oil speculators kicking themselves right now…

october-crude

It appears the bubble has burst. Or was that global demand hitting a wall?

UPDATE: Barry Ritholtz believes it’s pure and simple demand destruction. And now that oil is ‘barreling’ into the low 90s, it is a signal that there is further economic erosion head.

Airlines have nobody to blame but themselves

Southwest AirlinesIn the midst of oil-mania, Southwest significantly hedged their fuel consumption. Delta and American did not.

Guess who’s winning?

This is a management problem. Hedging is NOT speculation – you shouldn’t “lose” because you hedge, as the cost of fuel should wind up fixed if the hedge is managed appropriately. You determine your need for fuel, and figure out how that flows through to ticket price. Then you purchase forward contracts for that fuel and fix your ticket price appropriately. If fuel prices go up you take your gains on the contracts, which in turn offset your rising costs at consumption time. If fuel prices go down, you lose on the contracts but your fuel price has fallen as you’re buying it. Margin on your service stays the same, as you set your prices in advance.

Not hedging your fuel costs in this environment is the real speculation. And I’ll add that those who do cover their butts have the addition perk of being able to raise their ticket prices (even if slightly) on the back’s of their competitors’ misfortune without significantly effecting volume.

UPDATE: Forbes says: “The sky may not be falling for airlines just yet, but darker clouds could be just around the corner.”

Agreed (particularly if they don’t update their financial management tools to at least late 20th century levels).

UPDATE 2: Southwest turns its 69th consecutive profitable quarter.

Monday Morning’s Weekend in Review

Linkfest Link Barrage Tidbits on real estate and oil, since this last weekend was about sun and fun (at least around here).

Adieu.