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BusinessInsider - "Southwest Airlines employs a crack team of 4 fuel traders to hedge energy prices — and they've saved the company $1.2 billion this year"

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"Send me your most arrogant person on the Street and have them come work for us in the fuel hedge, and we will humble them in about 10 minutes," Monroe told the newspaper.


Southwest Airlines employs a crack team of 4 fuel traders to hedge energy prices — and they've saved the company $1.2 billion this year

8 hours ago
  • Southwest Airlines' four fuel traders have saved the carrier $1.2 billion this year, the FT reported.
  • The airline's hedging program has helped blunt the impact of soaring energy prices.
  • Southwest's treasurer compared the challenge of hedging fuel to flying with a 6-month-old baby.

A crack team of four fuel traders at Southwest Airlines have saved the company a whopping $1.2 billion this year, the Financial Times reported this week.

Southwest's hedges have slashed its estimated fuel costs by 70 cents to between $3.30 and $3.40 a gallon this quarter, the carrier disclosed in a recent trading update. It pegged the fair market value of its fuel-derivative contracts for this year at $1.2 billion.

The company's treasurer, Chris Monroe, and his team trade crude-oil derivatives as a proxy for jet fuel. They deal with Goldman Sachs, JPMorgan, and seven more of Wall Street's shrewdest commodity-trading desks, the FT said.

"Send me your most arrogant person on the Street and have them come work for us in the fuel hedge, and we will humble them in about 10 minutes," Monroe told the newspaper.

Hedging jet fuel is as fraught with danger as flying with a 6-month-old baby, Monroe said. Their caretaker may have fed them, made sure they've napped, and done their best to make them comfortable, he continued.

"But anybody that's flown with a small baby knows that something can go wrong," Monroe noted, adding that the baby will let everyone know they're upset, and their guardians won't know exactly how to stop the screaming.

Hedging is paying off

Southwest began hedging its fuel costs in the early 1990s after crude prices spiked during the first Gulf War. It now stands with Alaska Airlines as the only two US carriers still in that business, the FT said. Fuel costs account for a third of its operating costs, meaning any savings can provide a significant boost to its profits.

While Southwest lost money on its hedges between 2015 and 2017, they're in the green this year as Russia's ongoing invasion of Ukraine has disrupted supply chains and driven oil prices skyward.

Pandemic-related disruptions and the global economy's reopening have also played a part; the price of jet fuel on the US Gulf of Mexico has more than quadrupled in the past two years to $4 a gallon, Energy Information Administration data shows.

"The current energy environment is exactly why we hedge fuel," Southwest CFO Tammy Romo said on the carrier's first-quarter earnings call, according to a transcript on Sentieo, a financial-research site.

"Our fuel hedge is providing excellent protection against rising energy prices and significantly offsets the market price increase in jet fuel in first quarter 2022," Romo added.

Southwest's fuel traders aim to hedge at least 50% of Southwest's fuel costs each year, and exclusively use call options and call spreads, Monroe told the FT.

He described the approach as an "insurance policy" given the calls — which grant the right to buy crude at a fixed price by a certain date — typically increase in value if crude prices rise.

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Are Oil Prices Heading Back To $120?

By Josh Owens - Jun 28, 2022, 2:00 PM CDT

Reader Update: Whether you are new to the oil and gas industry or an energy market veteran, you will regret not signing up for Global Energy Alert.'s premium newsletter provides everything from geopolitical analysis to trading analysis, all for less than a cup of coffee per week.




Chart of the Week


- The conflict between two rival governments in Libya is set to worsen as calls to replace the head of the national oil company (NOC), Mustafa Sanalla, intensify. Meanwhile, skirmishes in the country show no sign of letting up.  

- If Libya’s NOC does shut down all ports in the Gulf of Sirte (see below for detail), total exports could drop as low as 400,000 b/d, bringing the tally of idled production capacity to 800,000 b/d. 

- Political talks held in Geneva between the Tripoli and Benghazi governments failed spectacularly earlier this month, leaving prospects for a comprehensive settlement at a low point.

- Even before the NOC ultimatum, Libyan production had fallen to 700,000 b/d recently, almost halving from output rates earlier this year as key producing fields remain blocked by the Petroleum Facilities Guard. 

Market Movers

- Chinese oil major Petrochina (SHA:601857) is considering the sale of its gas projects in Australia and Canadian oil sands, diverting funds away from jurisdictions that might sanction China. 

- In a move to safeguard its Iraqi drilling contracts, US-based oil services major Schlumberger (NYSE:SLB) said it will not apply for any oil and gas drilling tenders in Iraqi Kurdistan.

- Brazil’s state-controlled oil firm Petrobras (NYSE:PBR) elected its second CEO in two months, with Caio Paes de Andrade facing an uphill battle to halt the surge in transportation fuel prices. 

Tuesday, June 28, 2022

As we predicted last week, the temporary weakness in oil prices coming from a widespread futures sell-off by speculators was nothing more than just a respite before another upwards climb. The unchanged physical tightness in oil markets, which can be seen from backwardation, combined with French President Macron highlighting the lack of spare production capacity of Middle Eastern oil producers stoked bullish sentiment. With Libya potentially losing another 300,000 b/d of its production/exports in the coming days, a jump above $120 per barrel later this week is very much on the cards.

Western Powers Mull Russian Oil Price Cap. G7 countries have agreed to explore imposing a ban on transporting crude that has been sold above a capped price, despite analysts warning that such measures dramatically increase the likelihood of sudden supply cuts from Russia.

G7 Summit Might’ve Blown OPEC+ Narrative. At this week’s G7 summit in Bavaria, French President Emmanuel Macron cited the heads of the UAE and Saudi Arabia, saying that both had informed him that they can barely increase production over the short term. 

Iran Nuclear Talks Might Resume This Week. Following a European push to revive the long-stalled negotiations on Iran’s nuclear program, indirect talks between Tehran and Washington are set to restart over the upcoming days in the capital of Qatar, Doha.

EU Fossil Car Phase-Out Might Run Aground. According to Reuters reports, at least five countries (amongst them Italy and Portugal) want to delay the European Union’s 2035 deadline to ban sales of petrol and diesel cars, postponing it to 2040 amidst widespread fears of slower-than-assumed charger rollouts. 

Libya Risks Another Protest-Triggered Wave of Force Majeure. Libya’s National Oil Corporation could declare force majeure within the next two days unless production and oil terminal operations resume in the Gulf of Sirte, hosting four major crude export terminals (Es Sider, Ras Lanuf, Brega, and Zueitina). 

Kurdistan Sees Ramp Up of Missile Attacks. Kurdistan’s Khor Mor natural gas field has seen its third rocket attack in less than a week, with missile hits on Kurdish assets proliferating amidst an intensifying conflict between federal authorities in Baghdad and the breakaway government in Erbil. 

US EPA Seeks to Toughen Ozone Restrictions for Drillers. Potentially lengthening permitting procedures and enhancing government supervision, the Biden Administration is seeking to toughen anti-smog requirements in the Permian Basin as it has seen above-normal ozone levels amidst intense drilling.

Nigeria Fakes it Until it Makes It. Despite its oil production is more than 500,000 b/d below the 1.8 million b/d required to keep its budget breakeven, Nigeria’s Oil Ministry said the African country would be able to meet its OPEC+ production quota by the end of August. 

India’s Power Shortages Ease Thanks to Wind and Hydro. The arrival of the monsoon season into India, as evidenced by higher production rates from hydro and wind power plants, alleviated the pressure on Indian power generation, with grid frequency falling below the minimum threshold only 9.8% of the time in May. 

Shipping Profitability Falls to Lowest in Two Months. The Baltic Exchange’s main freight index, the most frequently used gauge of the profitability of dry bulk shipping, has fallen to 2,204 points, the lowest in two months as ongoing weakness in China-bound deliveries drags earnings down.  

Offshore Uruguay Might be the Next Hotspot. Now that the Venus wildcat drilled in offshore Namibia has created shockwaves across the market, UK major Shell (LON:SHEL) and US independent Apache (NASDAQ:APA) won exploration rights for three offshore blocks in Uruguay, seeking to find analogies with the Namibian giant discovery. 

Stellantis Buys Stake in Lithium Miner. Potentially a wider trend in the car-making industry, the French-Italian automobile consortium Stellantis (BIT:STLA) is set to buy an 8% stake in lithium miner Vulcan Energy, less than a year after the two signed a 5-year supply deal that would see Vulcan deliver up to 100,000 tons of battery-grade LiOH.

Latin American Diesel Price Surge Come At the Worst Time. Just as Latin American agriculture powerhouses are heading into harvest season, the price of diesel continues to hover around all-time highs recorded mid-month, with Brazilian CFR cargoes assessed at some $183 per barrel.

By Josh Owens for 

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