Does fuel hedging increase fuel prices?

[Beetle007]

Many analysts are blaming speculators for driving the prices of oil higher. Oil hedging is the same thing as speculating on higher oil. Therefore, it stands to reason that oil hedging will increase the price of fuel.

For example, lets say 10 airlies decide to invest billions in oil futures. The oil futures will naturally increase in price due to the increased demand. The airlines will cause a self fulfilling prophecy because oil prices will increase and their hedges will appear brilliant

Lets say all companies think that oil will decrease in price. Oil futures will have less demand and the price of oil will decrease. Another self fulfilling prophecy.

Oil prices are being driven by the supply and demand of oil futures and derivatives.

 

[tomgoodman]

The market rules

Oil prices are being driven by the supply and demand of oil futures and derivatives.

That's somewhat true, but it applies equally to any type of market. People want to buy things which they think will increase in value, and their bidding tends to push the price higher. Expectations of what others will pay tomorrow dictate what a buyer is willing to pay today. This cannot be changed without price controls, which will immediately cause hoarding and shortages.

 

[lowlycfi]

Oh boy, here it comes. SWA will be blamed for the rising price of oil somewhere in this thread's future.

 

[Secret Squirrel]

Swa Has Screwed Us All!!! I Knew It!!! They Are Trying To Bring Down The Whole Damn Aviation Industry!!!!

 

[B727Driver]

amount of fuel hedged by SWA or any airline is so small that it is such a speck on the oil market radar.....nice try.

 

[§kyye Candy]

If we would increase the supply from our own country, this would cease to be so much of an issue. Ask UAE, Saudi Arabia and Venezuela, to name a few. You can blame congress yet again for the continuing downward spiral and loss of jobs. Hopefully they will pull their heads out of their collective a$$es and open up Alaska, or at the very least, allow some offshore drilling. Why should China get to have all the fun?

 

[Beetle007]

This cannot be changed without price controls, which will immediately cause hoarding and shortages.

Some people have also proposed legislation that would prevent speculative trading of necessary commodities like energy.

This wouldn't really be a price control because you could sell it at any price today. You just couldn't sell it as a future or option based on a price at a future date.

I don't know the pros and cons of preventing energy speculation. Some quick research shows me that some countries already have strict controls on energy speculation. The U.S. has almost no controls on speculation

 

[Benhuntn]

Harvard U. hedges more oil than SWA. The IVY league as a whole hedges more fuel than all the airlines.

 

[sstearns2]

I just read an article about the oil futures market. It's gone from a few billion 10 years ago to about 250 billion today. So, yes I think speculators have helped create an oil bubble, but the airlines are small potatoes in it.

Reducing our oil consumption is much more effective than drilling more holes in the ground. The smart thing to do is to conserve our domestic oil reserves and buy from abroad. Think 50 years from now.

Scott

 

[Beetle007]

I don't think it would be considered hedging unless you are a major user of the commodity.

I would say that University Endowments make investments (not hedges).

 

[Muskycat]

Many analysts are blaming speculators for driving the prices of oil higher. Oil hedging is the same thing as speculating on higher oil. Therefore, it stands to reason that oil hedging will increase the price of fuel.

For example, lets say 10 airlies decide to invest billions in oil futures. The oil futures will naturally increase in price due to the increased demand. The airlines will cause a self fulfilling prophecy because oil prices will increase and their hedges will appear brilliant

Lets say all companies think that oil will decrease in price. Oil futures will have less demand and the price of oil will decrease. Another self fulfilling prophecy.

Oil prices are being driven by the supply and demand of oil futures and derivatives.

Speculation is suspected but on a very large scale. More and more people are pumping money into petroleum funds through their 401k's. I think the number invested used to be like 10 billion, now it's upwards of 260,000 billion. Which in turn those funds can buy out right contracts, puts, calls on the CBT or invest it however. So all this new moeny/ interest in the bullish market is ONE thing feeding this oil boom. However, the economy can't support it.
And when the oil bubble hits, look out. For those companies heavily hedge may get one heck of a ride. When markets make limit moves in commodities, whether it's up or down you are locked into your position. So when oil breaks and some companies are still long on their position, they might find themselves with a very large margin call to make. When a commodity like this is over bought it tends to make very volatile corrections.
You hear analyst talking about 10 to 15 dollar gas. Well maybe, but doubtful. Nobody could afford to go to work. It would cost more in gas then to just stay home. A minimum wage job doesn't go far these days.
I've traded commodities for many years. One thing is for certain. No matter how big the company or individual in time they get burnt if they are heavily leveraged in a market all the time. It's been hard to lose money in crude right now since it's been nothing but a bullish market with little or no pull back. Last week when it dropped 10 bucks some people lost their shirt if they didn't have deep enough pockets to absorb the loss. All depends where they bought in the market.

Interesting times are ahead...

 

[bugchaser]

Oil hedging is the same thing as speculating on higher oil.

Uh, not really! Some of you really need to go out and do some light reading and learn a little. Speculation and hedging are two totally different things. Speculators are gambling that they will make lots of money on the movement of oil or other commodities. They also generally are not users of the commodity. Hedgers, on the other hand are users of the underlying commodity and wish to lock in a price point. By putting a hedge in place, they set the price at an acceptable level so that they can plan their business. In simple terms, if you are going to have to buy oil in the future, you would buy futures now to lock in the current price. If prices rise, you will pay more at the pump but your futures position will offset this. If oil goes down, you will pay less at the pump but will lose on your futures positions. Either way, you know in advance what you are going to pay. No speculation involved. The most risky thing is to be a cash buyer. That is total speculation. Almost all other businesses in other industries use hedging to lock in prices in advance. There is no magic or luck involved here. Just good business practices that have been available for many decades. Hedges are expensive and it takes some discipline to use them. Most airlines where happy to take a risky cash position and it has bitten them in the @ss. SW did no get lucky, they just continued to do business the same way they always have. The other guys just got unlucky.

 

[YourPilotFriend]

I'm assuming SW's credit rating allows them to only have to put down minimal dollars to secure these hedges.

 

[~~~^~~~]

I don't think it would be considered hedging unless you are a major user of the commodity.

I would say that University Endowments make investments (not hedges).

It is a hedge against the falling dollar. In effect, since the dollar's value is unstable, oil has become a form of currency.

These investments are rolled over in a constant buy position. It drastically increases prices.

The scary part is that there are trillions of dollars in funds looking to get in.

The market has failed. Folks are buying every commodity in sight because the dollar is not a reliable place to store wealth. Whoever our next President is will be faced with difficult choices.

Jimmy Carter v2.0 regardless of whether it is McCain, or Obama.

 

[ACL65PILOT]

Most airlines only use hedges as a form of revenue generation, and actually pay market price for fuel. This is how SWA does it.