The grounding of Silverjet brings to mind a question George Anders asked the other day in the Wall Street Journal: why doesn’t the airline industry do more to hedge its oil exposure? Without appropriate hedging, airlines are pretty much always speculating on the price of oil.
With oil near $130 a barrel, why does Southwest Airlines stand alone in the airline industry in its aggressive use of hedging to keep fuel costs under control? Southwest has locked in more than 70% of its jet-fuel requirements this year at a price equivalent to $51 a barrel for crude oil. By contrast, other big carriers have hedged 30% or less of their fuel needs this year. Those carriers generally expect to pay the equivalent of $85 to $100 per barrel of oil under their hedging programs.
Anders’ column suggest the answer might be frequent management changes in the industry. With such regular turnover in the top ranks, the airlines just lack management experience to deal with price changes. Law professor Larry Ribstein has some even more complicated explanations, including the possibility that airline management are concerned about putting complex hedges into their disclosures for fear of triggering memories of Enron. Worse, management may run the risk of Sarbanes-Oxley legal liability if they inadequately disclose their hedges. Perhaps its safer not to hedge. Why Rivals Don’t Copy Southwest’s Hedging [Wall Street Journal]
Is oil overpriced compared to gold?
That’s what cantankerous trader/real estate entrepreneur/ blogger/dj Lawrence Lewitinn argues in this piece in PopSerious, a hipster group blog more prone to features about puppies, fashion, and what commodities to bake with rather than money, finance, and what commodities to trade. Lewitinn maintains that since April, the ratio of barrels of oil to ounces of gold has gone from a five-year average of about 9.5-to-1 down to 7-to-1 and that the trade to make is to go long December gold and short December oil until that ratio goes back to at least 9-to-1.
We’re sure there’s more to this but we were distracted by pictures of contributors who are far better looking than Lawrence. Black Gold (And How You Might Make Money Off of Speculators’ Stupidity) [Popserious]
Roberta Yafie at the New York Post says everyone was wrong about the hundred dollar purchase heard round the world. She tells us that Richard Arens was the seller of the now famous barrel—not the buyer, as previously reported—and his supposed client is commodities conglomerate Cargill. Her source is “one NYMEX source”
Do you buy it? We’re not sure we do. Does Cargill make minimum order purchases from locals at above market prices? Sounds a bit like Coca Cola buying a really expensive cup of lemonade from your cousin’s card board stand just so Cameron can be the hit of the cul-du-sac. Our feeling is that it’s most certainly the other way around, with Arens as the cowboy with a strong desire for a legacy. Crude Trading [New York Post]
How exactly do you get bragging rights for being the guy who paid the most ever for a barrel of oil? When we first heard that a single, small trade had finally broken the $100 mark we were convinced it was a stunt, and possibly a prank. There were indications that the order might be a fugazi.
And, apparently, there was an early trade at $100 that turned out to be phony. But after an investigation by the NYMEX, it quickly became apparent that the trade was real. A guy trading on his own money bought 1,000 barrels of crude—the smallest trade allowed—from a colleague on the floor. (There are still whispers that these two arranged the trade and agreed to kick back the excess profit but we’ve found no evidence of this.)
The Financial Times tags Richard Arens as the trader. He runs some sort of brokerage called ABS. We’ll give him this: off the floor of the NYMEX (and maybe on the floor) no-one had ever heard of him before. Or, you know, we certainly hadn’t. This is no slight to Arens—the oil traders who are household names are few and far between. We found Arens name on a list of donors to a NYMEX related charity—he gave less than a thousand bucks.
Arens still isn’t talking so its possible he’s only famous by mistake. For very personal reasons, we were hoping the $100 man was former Amaranth trader Brian Hunter. But let’s not go there just now. Independent trader claims $100 oil record [Financial Times]
A reader tipped us off to the following energy market shake up this afternoon regarding oil prices. US crude prices shot up 40 cents when a Tulsa, Oklahoma television station reported on its website that a regional refinery was on fire from a lightning strike. The only problem – there was no fire, save for the pants of the KOTV webmaster (Brain Hunter, as part of Solengo’s new macro event-driven strategy). Web site error rocks global oil markets [Reuters]
Earlier this week, we established what the new BP will look like under the Hayward Regime. Less spa treatments. More tequila. Less “earth friendly”-type business. Now let’s take a look at what’s on Hayward’s to-do list for the next couple of months.
1. Keeping casualties on the BP premises at a minimum. Or, keeping news of deaths on the company’s watch at a minimum. The company has “suffered a series of accidents” in the last several years, and the critics have claimed they’re due to safety controls on par with airport security pre 9/11 and excessive cost cutting. In March 2005, an explosion at a Texas City refinery killed 15 and injured a few hundred more. So that looks kind of bad. As does the fact that it all could’ve been avoided had the higher-ups at the refinery heeded “serious warning signals.”
2. Keeping oil spills at a minimum. Last year there was one of those in Alaska, shutting down the nation’s biggest field, revealing “widespread corrosion problems in the pipeline network that BP operates” and “a Justice Department inquiry that is continuing.”
There’s a new sheriff in BP town but will there be one at Goldman Sachs, too? The boys at Rupert Murdoch’s Deal Journal note that Lord Browne (John Browne, Baron Browne of Madingley) has been a director at Goldman since 1999 and wonder if recent revelations might threaten that position. The London Times reports that Browne will lose his night job (and the $500,000/year that comes with), though their sources were unnamed and Goldman representatives declined to comment. The Lord will retain his role on the advisory board (as chairman) of Apax Partners Worldwide, the U.K. p.e. firm, but, as Deal Journal points out, us provincial Americans, and the extremely image conscious Goldman Sachs in particular, may not be willing to overlook Browne’s use of company funds (and perjury).
While we can vouch that Goldman—more so than other banks we’ve encountered—is a bit fanatical about its reputation, and has instilled a certain fear in its employees (whenever we IM our friends at 85 Broad for insider information or for a recap on their nights at Tejune, they hardly ever write back), perhaps they’ll overlook what happened across the pond in light of Browne’s business acumen (and because he wasn’t using their money, hence, not their problem). It’s not like Lloyd Blankefein doesn’t have any skeletons of his own (Magic Mountain is all we can say and we’ve already said too much).
Lord Browne and an Unlucky Number at Goldman [Deal Journal] Browne-Goldman II: Apax Stands Firm [Deal Journal] Apax Keeps Browne as Chairman After He Lied to Court [Bloomberg] Lie over gay partner ends BP chief’s career [London Times]