Are airlines buying futures contracts on oil
Apr 20, 2020, 10:19 am
#1
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Are airlines buying futures contracts on oil
Oil is now priced at 1986 levels. Once the economy rebounds more flights, more people driving etc, the demand will increase. So locking in low rates NOW will translate to more profits later.
[I'm assuming that the airlines won't disappear--people and goods will have to get from point A to point B, the airlines are the [i]only way in general.]
Most buyers of "futures" contracts never actually take delivery--airlines are different, they USE oil.
[I'm assuming that the airlines won't disappear--people and goods will have to get from point A to point B, the airlines are the [i]only way in general.]
Most buyers of "futures" contracts never actually take delivery--airlines are different, they USE oil.
Apr 20, 2020, 12:57 pm
#2
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I don't believe that airlines take delivery, either. They don't buy futures on JET-A, they buy futures on some other form of petroleum.
Right now, airlines are conserving cash so I wouldn't expect them to be buying futures.
Right now, airlines are conserving cash so I wouldn't expect them to be buying futures.
Apr 20, 2020, 1:17 pm
#3
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they dont use oil, they use refined product. theyre also negative cash flow and can barely service existing obligations.
crude was also this range in the late 90s, especially if you adjust for inflation.
also theres storage problems affecting immediate futures and some weird contango happening, so its hard to get a fix on the "price"
crude was also this range in the late 90s, especially if you adjust for inflation.
also theres storage problems affecting immediate futures and some weird contango happening, so its hard to get a fix on the "price"
Apr 20, 2020, 2:39 pm
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Oil prices for some intermediate crude were below zero at some point today. When you can’t keep what you have and are obliged to take delivery of what you’ve got coming, you may have to pay to get rid of what you already got in ways but won’t be able to keep.
Normally, very low oil prices would act as a big form of economic stimulus. But these aren’t normal times, so welcome to uncertainty being high.
Normally, very low oil prices would act as a big form of economic stimulus. But these aren’t normal times, so welcome to uncertainty being high.
Apr 20, 2020, 3:19 pm
#5
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The gist of my question was either through futures contracts (or other means) to LOCK in prices for the future.
I recollect that Southwest prior to the last economic downturn was able to lock in petrol prices and remained profitable while the other airlines filed for Chapt. 11.
I recollect that Southwest prior to the last economic downturn was able to lock in petrol prices and remained profitable while the other airlines filed for Chapt. 11.
Apr 20, 2020, 3:54 pm
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There is already a thread on this topic. Happens to be in the WN forum, but the issue is the same.
Futures contracts work both ways. What they mean is that unless you sell the contract to someone else, at some point in the future, someone backs a proverbial tanker up to your door and asks where the nozzle from the hose goes. E.g., where are you storing the product?
There is no place for any more. Air carriers do not need more, have no cash to pay for it, and if they are locked into futures contracts, will wind up way over-paying. The exact opposite of what WN did to make money the last time.
All a way of saying that there is no way any cash-starved carrier, certainly one taking CARES Act funds is buying futures right now (or anytime in the next 18-24 months).
Futures contracts work both ways. What they mean is that unless you sell the contract to someone else, at some point in the future, someone backs a proverbial tanker up to your door and asks where the nozzle from the hose goes. E.g., where are you storing the product?
There is no place for any more. Air carriers do not need more, have no cash to pay for it, and if they are locked into futures contracts, will wind up way over-paying. The exact opposite of what WN did to make money the last time.
All a way of saying that there is no way any cash-starved carrier, certainly one taking CARES Act funds is buying futures right now (or anytime in the next 18-24 months).
Apr 21, 2020, 7:04 am
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The negative price is for delivery in the USA in the short term (reflecting the lack of storage space in the US). Airlines would be looking for delivery at some stage long in the future, for which the price will be very different.
In any event, low oil prices are slightly irrelevant when you have no idea if or when you will be flying again. For a commercial company, the only sensible reason for buying futures is to reduce risk (ie you know that you require xx gallons in October, so you lock in the price today - you are then not exposed to a higher price then. As they have no idea how many gallons they will need when, it's not risk reduction, it's pure speculation.
In any event, low oil prices are slightly irrelevant when you have no idea if or when you will be flying again. For a commercial company, the only sensible reason for buying futures is to reduce risk (ie you know that you require xx gallons in October, so you lock in the price today - you are then not exposed to a higher price then. As they have no idea how many gallons they will need when, it's not risk reduction, it's pure speculation.
Apr 23, 2020, 8:16 am
#9
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I used to be a future and options trader, so can I clarify a few things.
Most Oil trades in contracts which can offer a physical delivery or a cash settlement on the difference to the Spot price at expiry. The vast majority of futures are cash settled not physical delivery.
Airlines trade oil contracts (Brent and WTI being the two main indices which have the most liquidity) as a proxy for the price of jet full.
Each airline will have their own strategy which probably changes as they take predictions on the future. Reading about BA's annual reports, they seem to buy a certain amount on ahead and a certain amount on Spot.
Most Oil trades in contracts which can offer a physical delivery or a cash settlement on the difference to the Spot price at expiry. The vast majority of futures are cash settled not physical delivery.
Airlines trade oil contracts (Brent and WTI being the two main indices which have the most liquidity) as a proxy for the price of jet full.
Each airline will have their own strategy which probably changes as they take predictions on the future. Reading about BA's annual reports, they seem to buy a certain amount on ahead and a certain amount on Spot.