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]
The unadulterated euphoria you-know-who experiences while mainlining cream filled gold sponge cakes every day at 3 is about to be compromised.
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.”
Read more »
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]
How will things change at BP under the new Tony Hayward regime? Since it was announced yesterday that chief exec John Browne had resigned, effective immediately, it’s the question that’s been weighing on all our minds (after “What would a hostile take-over by Rupert Murdoch feel like?” (A. Awkward) and “How can I get this wine stain out?” (A. Club soda and salt)). Luckily, Reuters has some nifty answers (and a few gay innuendos, too, ‘cause that’s how they roll).
First of all, the Starship BP will no longer have a Captain who kind people might refer to as “distinguished looking” (read: old); Hayward is a “boyish-looking 49 year-old.” Point: BP-TH. But don’t start celebrating just yet: Junior apparently has no interest in taking care of his appearance (in stark contrast to the “always immaculately-groomed Browne”), which means no more eye candy at the helm and almost certainly suggests that spa treatments for good employees on the company dime are over. Point: BP-LJB.
Reuters also notes that things may lighten up around the office with the more “down-to-earth” and less “distant” Hayward, which will likely please the staff, until it realizes that Mr. Good Times, who “doesn’t work on weekends apart from some Sunday evenings” and “takes all [his] holidays” is running BP into the toilet. Browne didn’t turn what was essentially a failed company into “the second-largest non-government controlled oil company in the world” by spending time with his wife and two children. Point: BP-LJB. (But also, Point: BP-TH, because who doesn’t love Tequila Tuesdays?)
The former chief exec’s devotion to the environment (Browne was instrumental in getting other oil companies to address global warming and CO2 caps) may also be shelved under Hayward. A spokesperson for BP claimed it would continue its green tech investments, but some people are not certain that Hayward has the same “dedication to green issues or his fondness for the accolades this brought.” A point of contention: some of you may care more about Browne’s use of company money in Boy’s Towne than trees and baby seals and vice versa (of course, this presupposes that Hayward won’t take a page from the John Browne/Todd Thomson School of Company Perks but what the hey, we’ll give him this one). So award this point as you see fit.
New BP boss may bring changes in style [Reuters]
Daniel Gross doesn’t have much of a reputation as a friend of the Bush administration. So it’s refreshing to see Gross debunking the latest anti-Bush conspiracy. You know, the one where Goldman Sachs and the Bush administration have pushed down the price of gasoline in order to save the GOP congressional majority in the midterm elections. This never made much sense to anyone who understands the markets in oil and gasoline pricing, much less anyone who has spent any time talking to Goldman bankers about politics. (Hint: Goldman is not a rightwing hothouse.)
Anyway, here’s Gross’s takedown of the great gasoline conspiracy.
So, was this engineered by Henry Paulson and Goldman Sachs? It’s doubtful, although Goldman hasn’t done much to dispel questions. The bank hasn’t offered a good reason as to why it decided to reduce the overall weighting of gasoline in the index this summer. Still, the company is hardly a Republican redoubt. There are likely as many Kerry supporters as Bush supporters in the firm’s upper ranks. And if Goldman was trying to manipulate the market for political reasons, it certainly picked an awfully transparent way of doing it. It publicly announced the contours of the changes in advance and gave investors and traders time to plot strategies surrounding the move.
More broadly, though, commodity markets have shown themselves to be beyond the control of presidents, the Saudis, or even Henry Paulson and Goldman Sachs. The world is an increasingly connected, complicated, and volatile place, which makes the prices for commodities that fuel the global economy dependent on a growing range of factors. At root, gasoline is getting cheaper largely because the thing you need to make it—crude oil—has been getting cheaper. And Goldman actually slightly increased the weighting of crude oil in the overall index this summer.
Closer to home, there was plenty of activity in August and September—beyond Goldman’s index maneuvers—that helped push market and retail prices of energy lower. They include: a growing sense that the U.S. economy, the largest user of oil on the planet, has been slowing rapidly and might be headed toward a recession; a shift in the mix of the U.S. car fleet away from trucks and SUVs and toward smaller vehicles; a potential big find in the Gulf of Mexico; a growing boomlet in ethanol and alternative energy; a bust of a hurricane season; and the blowup of a gigantic hedge fund with huge positions in natural gas.
So, the recent fall in energy prices is almost certainly not a Bush conspiracy, just a bit of electoral good luck.
It’s also kind of a strange conspiracy for the left to be raising. If voters discovered that the Republicans were engineering a reduction in gas prices, do you think that they would turn against the GOP? Not likely. They’d probably say, “Hey! Those guys are finally doing something that helps me out. If they can reduce the price of gas, they’ve got my vote.” So the more popular the conspiracy theory gets, the more popular the Republicans will be.
The Oil Conspiracy [Slate]
Peter Cohan at Blogginstocks gathers together various news stories indicating that an October Surprise Iran invasion might be in the works in the weeks leading up to the midterm elections. His suggestion: profit! More specifically:
How can you profit from the October surprise? Well, buying oil company stocks is one way. ExxonMobil Corporation (NYSE: XOM), ConocoPhillips (NYSE: COP), BP plc (NYSE ADR: BP), and Petroleos Brasileiro (NYSE ADR: PBR) are a few that come to mind. And with oil prices below $59, the price of a barrel of oil would climb along with these stocks on news of the Iran invasion.
As we’ve noted before, the Bush administration is highly sensitive to Muslim sentiment and is unlikely to launch an attack during Ramadan. But Ramadan ends in late October—October 24—so make sure you time this thing right.
Could there be an October Surprise? Something to do with Iran? Can you trade on it? [BlogginStocks]
OPEC is already grumbling about the decline of oil prices, and may schedule a special meeting in advance of its regular meeting in December. There are some who think that the meeting won’t be until the end of Ramadan on October 24th. But we haven’t seen much evidence that the Islamic holy days preclude having business meetings.
What’s more, former Democratic presidential candidate is predicting that the US will attack Iran before the midterm elections in November. Oddly enough, Ramadan probably will delay this attack until late October or early November. The Bush administration is actually very respectful of the religious sensitivities of the world’s Muslims.
October Surprise [Huffington Post]