RPT-Airline hedges fuel rally in later dated oil prices

(Repeats with no changes)

By Catherine Ngai

Big airlines are making waves
in the oil market for the first time since prices went into a
tailspin nearly two years ago, betting this may be their best
chance to lock in cheap jet fuel for years to come, industry and
market sources say.

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: tmsnrt.rs/1VutfIc)

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)

The article RPT-Airline hedges fuel rally in later dated oil prices was originally published at Reuters - US Energy.