Thursday, May 14, 2009
Thursday, 14 May 2009
Shipping lines have hastened their fuel hedging since early April as oil's recent rally worried end users that the price of already tightening marine fuel supply will move further against them .
Airlines have so far resisted the move, after many were burnt last year from hedging activities at a time when crude was sliding from records, along with fears of lower travel demand due to the recession and from the H1N1 flu virus, traders in Asia said.
Utilities, the third sector that leans heavily on managing fuel costs, have seen relatively steady hedging activity.
'More hedgers are entering the market - not en masse, but we've certainly seen a rise in interest across the consumer spectrum in the last month,' Jonathan Kornafel, Asia director of US-based Hudson Capital Energy, said.
Asian fuel oil swap spreads for months further out, in particular the Q3/Q4 and Q4/Q1 timespreads, have been rising in line with crude since the beginning of last month as end users bought actively, traders said.
The correlation between the two timespreads and ICE Brent's front-month closing values between April 1 and midday Monday was a factor of 0.52, Reuters data showed. A factor of 1.0 shows perfect correlation while 0 means the values compared are not related at all.
Fuel oil's Q3/Q4 and Q4/Q1 timespreads were valued at a contango of US$5.08 and US$7.42 a tonne respectively by 0400 GMT on Monday, well above their closing values at minus US$10.08 and US$12.25 on April 1.
Shipping lines 'have been steadily buying up the back (end of the curve) for a while now', a derivatives trader said. 'There's still on average 20,000-30,000 tonnes of flow a day, for both the front-month contracts and the back-end quarterlies, for the past two to three weeks at least.'
Traders said buying sentiment, particularly in the prompt timespreads, was backed by a bullish market that saw the front timespreads rise from a contango of US$5 a tonne over a month ago to the current May/June value at US$2.75 in backwardation.
The fuel oil market has been supported by tight supplies for May and June, due to capacity cuts by European refiners and the start of the peak summer demand season in the Middle East.
Helped by hopes of economic and demand recovery, crude has risen three quarters towards US$60 a barrel since touching this year's low of US$32.70 in January.
But the jet fuel market has seen a sell-off since late April, with the swine flu outbreak weighing on air travel and pulling jet fuel's prompt price spread to gas oil, or the regrade level, into negative domain for the first time in 10 months.
'We haven't done any airline hedges in 2009. From our point of view, airlines have not jumped back in. They're probably waiting until the point of maximum pain, once again,' Hudson's Mr Kornafel said.
The May regrade was valued at minus 20 cents a barrel on Monday, down from plus US$1.90 just over two weeks ago.
Most of the trades were at the prompt end of jet fuel's swap forward curve, either in the front-month outrights or the prompt regrade, while values at the back of the curve have held steady.
Most of the transactions were driven by traders on the physical market, whose exposures were at the prompt end of the curve, while most airlines tend to hedge further out at the back.
'There were little bits and pieces of airline business before the swine flu hit,' another derivatives trader said. 'Most have gotten out when their hedges from last year turned bad.'
Airlines were hit last year when crude sank from its peak above US$147, losing billions on hedges in anticipation of higher prices. Many have since slashed fuel hedges to save on rising risk management costs amid the bad times.
'Actually, with the jet market so weak, it may be time for the airlines to come in and hedge now. Especially if the wisdom is that the swine flu is easing,' the second trader added.
Reflecting the weakness, jet's premium to Dubai crude, particularly in the front, have fallen since April 1. The May value has been below US$8 a barrel for the past six sessions and was at US$7.30 by 0830 GMT on Monday, versus US$10.32 on April 1.
'We haven't seen a big pick-up in hedging but I think it's more because of credit issues, not market issues,' said Tony Nunan, risk manager at Mitsubishi Corp in Tokyo.
As airlines face a drop in passenger counts, managers may need more convincing for the extra insurance over fuel costs.
'One of the things is for people to give them credit, and on the other side they need to get management approval. There's still some feeling that this rally could turn around quickly and that prices could drop again,' Mr Nunan said, pointing to Monday's more than US$1 drop in crude.