Trading Jenga: The Ups and Downs of Fuel
Is it time to buy Refiners and Airline companies? Perhaps. It could be time to inquire about existing institutional hedging program for airline companies. The commodity swing upside may belong to another. The value chain may deliver profits in the form of lower price airline tickets for business travel and vacationers. Airlines compete fiercely for customers and business. It is a challenging industry and requires the knowledge that “no one gets it right every time”.
Are you sure you can catch the upside when you buy airline stocks? Many of the airlines almost bankrupt from their failure to lock in hedges about two years ago. This created internal demands from senior executives and Board of Directors to engage in long term hedging programs. These companies lost money and annual bonuses disappeared.
Miami based WORLD FUELS is the leader in this business. They are a Fortune 100 company that manages risk for airlines and airports on a very scale. Jet fuel prices are at a five year low. The front month has fallen 9.8%. If you are not seeing this type of price change in your data base, install several direct commodity price links, rather than relying solely on your financial trading house to deliver quotes. Lock in a five year contract for future physical deliveries tied to this price forecast. Look for a swap partner if needed.
This is a novel time in the energy business. Recent crude oil prices of $42.00 per barrel and gasoline pump prices of $1.95 per gallon are uncommon. What does this mean and where do you place stops or call options to protect your profits? If you are small, this may not be the time to sell out. It may be the time to significantly increase your trading volumes with strategically placed call options and swaps.
Evaluate your scoreboard and understand the risk in your portfolio before adding positions in less favorable delivery areas. This may create further structuring issues ahead due to logistical problems connected with moving the actual volumes. These issues drive the financial value for a swap, Futures position or Option.
Do you want to build or expand this sector of your business? Invite several key business partners like Vitol, World Fuels, Trafigura, Cargill, or Enjet into your office. These companies are masters at fuel trading and managing risk. Good risk management must hedge currency risk and jet fuel prices in LATAM airports. Currency risk may exceed fuel risk in Greece or Russia. Do not leave areas of exposure unaddressed.
Check daily commodity prices online:
Jet Fuel Wholesale Prices http://www.indexmundi.com/commodities/?commodity=jet-fuel
Retail Jet Fuel Prices https://www.globalair.com/airport/region.aspx
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