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We had previously looked at the positioning of large commercial traders in the oil futures market. While the consensus view had been that this meant that oil prices were due to fall significantly, we basically took the stance that the data implied no such thing.
Since then crude oil prices have risen, with Brent oil futures threatening to break the $ 80 barrier and by our count, at least 4 grades of oil trading above the critical $ 80 mark. With prices firmly entrenched in a long-term upswing, we were surprised to see that the commercial traders had started to actually go long crude oil futures.
This was the second consecutive week where commercials expanded their net long position after shorting this market for what seemed like an eternity.
So what do we make of this change in behavior?
Where is this coming from and what it means
The one group that has been notoriously absent from trading crude oil positions in the last few years has been the airline group. Having been burnt a few times by hedging oil prices too high, they have stayed on the sidelines since 2016.
While carriers saved hundreds of millions of dollars from oil prices halving since June, they forfeited a large chunk of that gain because of the fuel hedges they bought as protection against oil rising.
The bulk of those hedges – which effectively lock in fuel costs in advance – are set at levels that force airlines to pay more for fuel than current market prices, turning them into a hindrance rather than a help.
As a result, three of the four biggest carriers – Delta, Southwest and United – said this week they were rethinking their hedging tactics. Meanwhile, American, which does not hedge fuel costs at all, is reaping the biggest savings.
Southwest Airlines Co. said on Thursday its outstanding hedges represented a loss of $ 1.8 billion through 2018, at Jan. 15 prices. However, it still expects a fuel bill that is more than 30 cents per gallon lower this year compared to 2015, or a roughly half-billion dollar net benefit.
It was this group’s absence that distorted the futures positioning in the crude oil market and gave the appearance that collectively “the hedgers” were bearish on oil. That logic proved very costly as anyone who went by the commitment of traders report, stayed away from long positions and missed the entire rally.
However, with prices breaching past levels that no analyst thought possible last year, the airlines may be getting religion. Fuel represents the single biggest cost factor for airlines and it is hard to pass on unless capacity utilization is extremely high. While for most part airlines have denied that they will hedge, we believe some in the group are now breaking ranks. There are two likely reasons for this. The first being the certainty of cash flow is likely to assuage investor concerns, even if it is at a much higher price than they should have hedged. The second is this.
While the front end of the curve is flirting with much higher prices, airlines still have the opportunity to lock in sub-$ 60/barrel prices further out. So in a sense, oil prices have to fall more than $ 15/barrel from today’s prices for them to actually lose money on further out hedges. We think that they will embrace this opportunity as world oil fundamentals continue to tighten and supply surprises will continue to be on the downside.
As they do so, we think the incredible backwardation currently visible will begin to ease and the curve will become flatter. To some extent, this will be counterbalanced by increased producer hedging as they see an opportunity to lock in good prices, but on the whole, the curve will flatten in our view. The biggest impact of this though will be on oil producers. Oil producers continued to be priced for a $ 50/barrel market, and as the futures curve reflects the correct longer term supply demand situation, oil producers should embark on a spectacular rally.
Oil producers have outperformed the broader indices recently, but we believe this is a long-term trend that can still be bought. Our favorite oil producers are trading at a fraction of their fair value and offer gains not available anywhere else in the market. Oil itself has had a sensational run and is due for a pullback. But the longer-term story is still intact and we continue to ignore silly stories about EVs denting demand.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Additional disclosure: We are long several energy related plays.
Virtually the entire state of Hawaii was in a panic Saturday, after the state emergency management agency warned that a ballistic missile was “INBOUND,” and that people should “SEEK IMMEDIATE SHELTER.”
“THIS IS NOT A DRILL,” said the message, complete with ALL CAPS. It was delivered all over. Words can’t do justice. Scroll down and you’ll see video.
Oh, but it was all a very big mistake.
If there is any bright side, maybe it’s that it all happened on a Saturday. No commuters, no school kids separated from their families–no financial markets, so the stock market didn’t crash. (Weekend or not, thank God the United States didn’t launch any kind of retaliatory attack.)
Take a look at the Twitter embeds below, showing a little bit about what it was like to live through this. (If the embeds don’t show, click through to the links.)
1. Robotic radio warning of “incoming ballistic missile.”
— Bethany (@bethuhneemartin) January 13, 2018
2. Broadcasting live on Periscope at the exact moment.
3. What it looked like on a phone.
4. What it looked like if you were watching television in Hawaii.
5. Human reaction.
“My mom and sister were crying. It was a false alarm, but betting a lot of people are shaken.”
6. More human reaction.
“In one moment our lives changed completely, yes it was false, yes we’re alive. But this ruined me. My babies are 5 and 2months old they have their whole life ahead of them and here I sat with them in my arms saying sorry I tried to protect you the best I could.”
7. Live from the airport.
“My friend and ABC newsreader @JulianBAbbott was at Honolulu airport when the missile alert text message was sent out across #Hawaii. He’s about to board now but this is what he told me about what unfolded. *thread*”
8. This golfer who decided he’d die on the fairway.
9. Sorry about that.
The New Year is a beginning and an opportunity to get quiet, slow down and be intentional about what you want your next 365 days to be like. As an entrepreneur, you probably do this for your business, but do you do this for your life?
One year ago I created a tool to help me make sense of where I was and where I wanted to go. It was a wonderful experience and so now I’m excited to share it with you.
Filling out this one sheet of paper was incredibly clarifying for me. Once I finished it, I set it on my desk where I would see it every day. Within 3 months, all of my goals for the year were accomplished – even “the big intimidating one” that I was scared to name.
But here’s the thing – it wasn’t work – instead it felt like magic.
The act of writing things down helps us own our path. Our words and our thoughts are powerful things, and this tool can put those to work for you. Here’s what this process is designed to do:
- Clarify and understand what guides you
- Create an inventory of your life (today as it is now)
- Set your intentions for what you want to create (in the future)
- Get honest about what challenges you face
This is not a difficult process – but it can be. It can be joyful or it can be painful. It is different for everyone. No matter what, I hope this tool brings you clarify and for you. Feel free to share with others. And I hope you enjoy the journey.
And Happy New Year.
Here’s a thought exercise that starts getting kind of gross the deeper you dive into it: what if the entire world’s population lived in one city? What would that city look like? How big would the city be? Or how small can you pack it? Is it even possible? RealLifeLore says that you can fit 7.4 billion people into a city as big as Palestine. Which is, like, basically a bit bigger than the state of Delaware.