Monday, November 23, 2009
Wednesday, November 18, 2009
Trader's Commentary
While demand remains lackluster downstream, crude markets remain firm around the $80 mark despite rising inventories in WTI. Implied volatility has dropped in line. Recall there is incentive to increase inventories in Oklahoma for year end tax purposes, so beware the builds in Cushing. Physical markets in refined products have not been helped by warmer weather and a slow economic recovery. It is also notable that NG suffered a 27 cent down day based on reversing weather calls from yesterday.
Heating oil traders and suppliers taking on inventory with low demand may look to hedge with collars or put spreads in this market. The Dec-March calendar heating oil swap is priced at $2.12 per gallon.
180 – 200 put spread is now 6 cents or sell the 230 call.
Zero cost collar (hedger buys put) is 200 put versus 220 call.
Please call for further detail.
Heating oil traders and suppliers taking on inventory with low demand may look to hedge with collars or put spreads in this market. The Dec-March calendar heating oil swap is priced at $2.12 per gallon.
180 – 200 put spread is now 6 cents or sell the 230 call.
Zero cost collar (hedger buys put) is 200 put versus 220 call.
Please call for further detail.
Monday, November 16, 2009
Platts: Singapore Airlines strips down fuel hedge
Singapore Airlines strips down fuel hedge
Carrier takes gamble on prices holding steady for next 6 months
Singapore—Singapore Airlines has overhauled and stripped down its jet fuel hedging policy to leave itself deliberately more exposed in the jet fuel market, in a gamble that actual fuel prices will hold steady for the next six months, senior company executives told analysts in Singapore this week.
The airline, which is well known for running one of the most transparent hedging programs in the world, has dramatically scaled back from a position that in recent years covered as much as 60% of the jet fuel it consumes. Singapore Airlines currently holds 3.52 million barrels of jet fuel hedges at an average price of $100/barrel out until March 2010. The hedges are enough to cover 22% of the 16 million barrels the airline expects to consume in the six months up to then. The position is well below the minimum
30% protection Singapore Airlines once required. Chief Executive Officer Chew Choon Seng said the board of Singapore Airlines had pushed back on taking bigger hedges after the extreme volatility in fuel prices of the past year.
“We—when I say we I mean not just the management but the board committee that oversees our hedging activities—had to review the policy in the light of the substantial losses that were incurred when oil and fuel took a precipitous drop,” said Chew. “The magnitude of the volatility forced us to re-examine the wisdom of adhering to the previously laid-down policy. And I suppose our counter-parties in hedging did the same too, because their pricing on hedging instruments corrected very sharply.”
Chew’s comments suggest that the premiums charged for call options close to prevailing market values have simply become too expensive for the airline, especially since it has sworn off the very risky strategy of covering some of those costs through the sale of put options to other companies. Singapore Airlines has steered away from taking outright positions in the swaps markets, or dealing in risky collar option structures. It has opted instead for straightforward call options, which can be costly when volatility is high.
Call options give holders the right to buy protection in the shape of cheaply priced derivatives after a major market rally. They are usually bought with strike prices above prevailing levels, as an insurance policy against a spike.
“I suppose it reflects the underlying volatility,” Chew said of the increasingly expensive call options on offer. “And as a result of which the prices that we were getting on the market were not worth the risks that were being covered, and hence we decided to trim the level of our exposure.”
A massive loss from its hedges in the last six months forced the airline to take a step back from hedging in general. The Singapore Airlines group as a whole lost almost half a billion Singapore dollars in the six months ended September 30. The parent company lost S$400 million ($289 million) from its hedges, while its cargo company lost another S$70 million, and its budget airline SilkAir lost a further S$16 million.
Much of those losses would have been offset by lower fuel bills in the physical jet fuel market. Jet fuel costs have made up 36% of Singapore Airlines’ expenses so far this financial year, and the company’s decision to turn its back on its previous, well-defined hedging strategy prompted questions from analysts— particularly about its assumption that jet fuel prices should hold steady for some time to come.
“I appreciate that you do believe that fuel prices will stay at the current levels, but obviously a hedging strategy is to hedge against the risk that we’re wrong, so why have you taken a slightly different approach than you’ve taken previously,” asked HSBC bank analyst Mark Webb. Chew defended Singapore Airlines’ decision to effectively take the risk that oil prices will not rise much from current levels. “The fact of the matter is that the fundamentals of the global economy are not that rosy, but markets seem to be riding ahead on high liquidity. Whether that’s sustainable remains to be seen,” he said. Chew added that the airline noted with interest that Saudi Arabia in particular was hoping to maintain oil prices at current levels, and avoid any further gains.
“But at the end of the day markets have minds of their own, and so...you place your money and you take your pick,” Chew acknowledged. The company has cut hedges to minimal levels in a bid to slash reported derivatives losses on its books by the end of the year. At current prices, its remaining hedges would generate a S$50 million loss in the next six months, much less than the red ink it suffered in the last six months. The decision could ultimately be looked on by shareholders with hindsight as wise or foolish. Singapore Airlines acknowledged that a big rally in oil prices would now be worse for business than usual.
“Of course, if jet fuel prices go above $100 or go near $100, then hedging losses will be less. But conversely, our fuel expenditure will go up, and we certainly hope that will not be the case, because being hedged only 22%, it leaves 78% naked,” said Chew. Physical jet fuel prices closed in Singapore November 12 at $85.22/barrel, down 37 cents/b on the day but up $2.44/b since the start of the month.—Dave Ernsberger
Carrier takes gamble on prices holding steady for next 6 months
Singapore—Singapore Airlines has overhauled and stripped down its jet fuel hedging policy to leave itself deliberately more exposed in the jet fuel market, in a gamble that actual fuel prices will hold steady for the next six months, senior company executives told analysts in Singapore this week.
The airline, which is well known for running one of the most transparent hedging programs in the world, has dramatically scaled back from a position that in recent years covered as much as 60% of the jet fuel it consumes. Singapore Airlines currently holds 3.52 million barrels of jet fuel hedges at an average price of $100/barrel out until March 2010. The hedges are enough to cover 22% of the 16 million barrels the airline expects to consume in the six months up to then. The position is well below the minimum
30% protection Singapore Airlines once required. Chief Executive Officer Chew Choon Seng said the board of Singapore Airlines had pushed back on taking bigger hedges after the extreme volatility in fuel prices of the past year.
“We—when I say we I mean not just the management but the board committee that oversees our hedging activities—had to review the policy in the light of the substantial losses that were incurred when oil and fuel took a precipitous drop,” said Chew. “The magnitude of the volatility forced us to re-examine the wisdom of adhering to the previously laid-down policy. And I suppose our counter-parties in hedging did the same too, because their pricing on hedging instruments corrected very sharply.”
Chew’s comments suggest that the premiums charged for call options close to prevailing market values have simply become too expensive for the airline, especially since it has sworn off the very risky strategy of covering some of those costs through the sale of put options to other companies. Singapore Airlines has steered away from taking outright positions in the swaps markets, or dealing in risky collar option structures. It has opted instead for straightforward call options, which can be costly when volatility is high.
Call options give holders the right to buy protection in the shape of cheaply priced derivatives after a major market rally. They are usually bought with strike prices above prevailing levels, as an insurance policy against a spike.
“I suppose it reflects the underlying volatility,” Chew said of the increasingly expensive call options on offer. “And as a result of which the prices that we were getting on the market were not worth the risks that were being covered, and hence we decided to trim the level of our exposure.”
A massive loss from its hedges in the last six months forced the airline to take a step back from hedging in general. The Singapore Airlines group as a whole lost almost half a billion Singapore dollars in the six months ended September 30. The parent company lost S$400 million ($289 million) from its hedges, while its cargo company lost another S$70 million, and its budget airline SilkAir lost a further S$16 million.
Much of those losses would have been offset by lower fuel bills in the physical jet fuel market. Jet fuel costs have made up 36% of Singapore Airlines’ expenses so far this financial year, and the company’s decision to turn its back on its previous, well-defined hedging strategy prompted questions from analysts— particularly about its assumption that jet fuel prices should hold steady for some time to come.
“I appreciate that you do believe that fuel prices will stay at the current levels, but obviously a hedging strategy is to hedge against the risk that we’re wrong, so why have you taken a slightly different approach than you’ve taken previously,” asked HSBC bank analyst Mark Webb. Chew defended Singapore Airlines’ decision to effectively take the risk that oil prices will not rise much from current levels. “The fact of the matter is that the fundamentals of the global economy are not that rosy, but markets seem to be riding ahead on high liquidity. Whether that’s sustainable remains to be seen,” he said. Chew added that the airline noted with interest that Saudi Arabia in particular was hoping to maintain oil prices at current levels, and avoid any further gains.
“But at the end of the day markets have minds of their own, and so...you place your money and you take your pick,” Chew acknowledged. The company has cut hedges to minimal levels in a bid to slash reported derivatives losses on its books by the end of the year. At current prices, its remaining hedges would generate a S$50 million loss in the next six months, much less than the red ink it suffered in the last six months. The decision could ultimately be looked on by shareholders with hindsight as wise or foolish. Singapore Airlines acknowledged that a big rally in oil prices would now be worse for business than usual.
“Of course, if jet fuel prices go above $100 or go near $100, then hedging losses will be less. But conversely, our fuel expenditure will go up, and we certainly hope that will not be the case, because being hedged only 22%, it leaves 78% naked,” said Chew. Physical jet fuel prices closed in Singapore November 12 at $85.22/barrel, down 37 cents/b on the day but up $2.44/b since the start of the month.—Dave Ernsberger
Thursday, November 12, 2009
Senate Committee on Banking: Discussion Draft of Financial Regulatory Reform
Senator Dodd (D-Conn) and 8 other Democratic members of the Senate Committee on Banking released an approximately 1,200 page draft proposal for financial regulatory reform yesterday.
All commodity swaps and options subject to US law are required to be submitted for clearing, with two exceptions:
A discussion draft summary is available at http://banking.senate.gov/public/_files/FinancialReformDiscussionDraft111009.pdf while the full discussion draft text is available at http://banking.senate.gov/public/_files/AYO09D44_xml.pdf.
All commodity swaps and options subject to US law are required to be submitted for clearing, with two exceptions:
- No clearing organization will accept the swap or option for clearing
- One of the parties to a trade is not a swap dealer or major swap participant AND is ineligible to use a clearing organization
A discussion draft summary is available at http://banking.senate.gov/public/_files/FinancialReformDiscussionDraft111009.pdf while the full discussion draft text is available at http://banking.senate.gov/public/_files/AYO09D44_xml.pdf.
Monday, November 9, 2009
Thursday, November 5, 2009
Wednesday, November 4, 2009
Tuesday, November 3, 2009
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