Southwest Pays Approx $51 USD A Barrel

Thir boss was interviewd on CNBC yesterday.

He says Southwest has been hedging (buying, selling) in futures
contracts for a decade (or more or less).

This is what futures markets ought to be about.

The food processing companies hedge their bets too.

Oil producers hedge to protect themselves too.

Farmers can and do too.

Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

If they survive the current awfulne$$, they oughta copy Souhwest--
individually, collectively, however.

Many say the oil market is a true bubble at $127 barrel, and anything
could happen.

One probable desirable regulation: No more ten percent margins.

Fifty percent margin should stabilize the hellacious chaos, taking
some of the gambling out of it.

Cynical comment: Commodity oil gamblers should instead please just bet
on football & other sports like many do mostly illegally.

Yes, reality is convoluted.

Oil supply falls, oil is $131+ as I post this ****sy "moral" rant.

On May 29, 7:32 am, Robert Cohen wrote:
Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

it costs a premium to buy futures and lock down rates. if oil prices
don't rise significantly, then you would lose money buying futures.

More details on this subject can be found in the article in the Wall Street
Journal dated May 28, 2008 entitled "Why Rivals Don't Copy Southwest's
Hedging". A couple of pertinent points is that they have hedged more than
70% of its jet-fuel requirements this year at a price equivalent to $51 a
barrel for crude oil. As a comparison, other big carriers have hedged 30%
or less of their fuel needs this year. "Southwest's longest-dated hedge,
covering more than 15% of its fuel needs in 2012 at about $63 a barrel, was
lined up about a year ago."

On 30/05/08 10:17, in article
, "bucky3"
wrote:

On May 29, 7:32 am, Robert Cohen wrote:
Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

it costs a premium to buy futures and lock down rates. if oil prices
don't rise significantly, then you would lose money buying futures.

I have never traded in oil but in money futures one only has to come
up with 10% of the contract to buy one. Thus for $100,000 you get
a contract for one million. A movement of 10% in the price
gives you a 100% profit. On down side you can lose you $100,000
with a 10% drop.

The oil futures apparently allow you to buy (or sale) forward
to 2015 (http://futures.tradingcharts.com/marketquotes/CL_.html)
whereas most traders will only deal in short term contracts
(months). However a company which wants to pin down a price
in, lets say 2012, can use the futures as a guarantee. They
are not speculating as such. They are covering their asses.
The main costs are the commissions, if the market is just
fluctuating and the speculator is buying and selling
a lot, he looses money there. If the market moves the wrong
way he looses. There is euphoria if he wins, nausea if he loses
or the market is dropping.

Southwest, in order to pay $51, bought futures several
years ago. If they are buying futures now for 2012
they might be negotiating for around $125, the trading
volume appears low. Obviously if the market starts going
against you you can sell out but you can guarantee
$125. That will look cheap if the oil goes to $200 in the
meantime. None of these contracts have to be maintained
by the same person up until delivery. But in the years
which follow, if you need the oil you can keep the contract
of the price keeps edging up.

In article ,
Earl Evleth wrote:

meantime. None of these contracts have to be maintained
by the same person up until delivery. But in the years
which follow, if you need the oil you can keep the contract
of the price keeps edging up.


Also, according to the Talking Heads on CNBC yesterday, only about
10% of futures contracts actually go to delivery.

On 30/05/08 15:18, in article
, "Kurt
Ullman" wrote:

Also, according to the Talking Heads on CNBC yesterday, only about
10% of futures contracts actually go to delivery.


I think that all the contracts are exercised but that they are traded
back and forth before doing so. In the case of money, perhaps
10 times more money is exchanged in contracts per day than actually
needed for financial transactions.

If anybody can clarify this point it would be useful.
What is true, however, is that the heavy market in trading
contracts can have a temporary inflationary effect on the market.
Eventually reality catches up. Right now there is a lot
of discussion over whether the world is suffering from
a commodities bubble in which the prices of various
commodities are inflated and will suddenly deflate.
Metals like copper, tin, nickel, etc have been driven up
to new highs by the economic boom in Asia, oil too.

It would not be exceptional that oil is too high by
30-50% and will peak and drop as the economy drops.
Rice and wheat are also inflated. So after the
dot-com and real estate bubble deflation commodities
might be next. But when bubbles break is impossible
to predict, that they will is not hard to predict.
So oil inflation will persist for a while. Even when
that bubble goes it might not drop down to below $80
a barrel.

On May 30, 9:56*am, Earl Evleth wrote:
On 30/05/08 15:18, in article
, "Kurt

Ullman" wrote:
Also, according to the Talking Heads on CNBC yesterday, only about
10% of futures contracts actually go to delivery.

I think that all the contracts are exercised but that they are traded
back and forth before doing so. *In the case of money, perhaps
10 times more money is exchanged in contracts per day than actually
needed for financial transactions.

If anybody can clarify this point it would be useful.
What is true, however, is that the heavy market in trading
contracts can have a temporary inflationary effect on the market.
Eventually reality catches up. Right now there is a lot
of discussion over whether the world is suffering from
a commodities bubble in which the prices of various
commodities are inflated and will suddenly deflate.
Metals like copper, tin, nickel, etc have been driven up
to new highs by the economic boom in Asia, oil too.

It would not be exceptional that oil is too high by
30-50% and will peak and drop as the economy drops.
Rice and wheat are also inflated. *So after the
dot-com and real estate bubble deflation commodities
might be next. *But when bubbles break is impossible
to predict, that they will is not hard to predict.
So oil inflation will persist for a while. Even when
that bubble goes it might not drop down to below $80
a barrel. *

The American public could kick the ****e out of gasolene prices in the
interim--until masssive change to electrics, whatever--if we merely
took paying passengers, as I semi-shrewdly plea in another recent post.
\

It's really now up to the people to read our so-called leaders the
riot act.

Nothing could be dumber than a depression/recession catalyzed by oil
price.

There is so much slack--for instance, empty passenger car seats--that
the (supposed) lack of supply really can be transcended or just f'ing
beaten (which was the first word that came to mind).

I can actually vaguely recall the end of WW II, and in the late 1940s
this USA was relatively
working together. (as per during the damned war).

On May 30, 1:17 am, bucky3 wrote:
On May 29, 7:32 am, Robert Cohen wrote:

Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

it costs a premium to buy futures and lock down rates. if oil prices
don't rise significantly, then you would lose money buying futures.

Let's not confuse futures, forwards and options, shall we. What SWA
has are a combination of swaps and call options, not futures or
forwards. The airline is not in the oil speculation business but
rather has hedged its exposure to price fluctations. Option calls are
like insurance policies - futures and forwards are investments with
risk. Swaps are a derivation on the theme and again act like
insurance policies, not risky investments.

al

On May 30, 2:04*pm, wrote:
On May 30, 1:17 am, bucky3 wrote:

On May 29, 7:32 am, Robert Cohen wrote:

Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

it costs a premium to buy futures and lock down rates. if oil prices
don't rise significantly, then you would lose money buying futures.

Let's not confuse futures, forwards and options, shall we. *What SWA
has are a combination of swaps and call options, not futures or
forwards. *The airline is not in the oil speculation business but
rather has hedged its exposure to price fluctations. *Option calls are
like insurance policies - futures and forwards are investments with
risk. *Swaps are a derivation on the theme and again act like
insurance policies, not risky investments.

al

I understand call and put options.

The premiums are the prices of options.

Give me an idea or estimate of how much in premiums the airline spends
or risks.

Can the other companies do similarly (thru 3rd parties or however they
trade)?

I agree that an option is not as risky as a futures contract, though
there are also several (complex to me) strategies or tactics in
hedging or "playing" options.

On May 30, 11:23 am, Robert Cohen wrote:
On May 30, 2:04 pm, wrote:



On May 30, 1:17 am, bucky3 wrote:

On May 29, 7:32 am, Robert Cohen wrote:

Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

it costs a premium to buy futures and lock down rates. if oil prices
don't rise significantly, then you would lose money buying futures.

Let's not confuse futures, forwards and options, shall we. What SWA
has are a combination of swaps and call options, not futures or
forwards. The airline is not in the oil speculation business but
rather has hedged its exposure to price fluctations. Option calls are
like insurance policies - futures and forwards are investments with
risk. Swaps are a derivation on the theme and again act like
insurance policies, not risky investments.

al

I understand call and put options.

The premiums are the prices of options.

There are no "premiums" for futures contracts.

Give me an idea or estimate of how much in premiums the airline spends
or risks.

They risk nothing - that is the value of an option over a future or
forward contract. It's no different than any other insurance a
company may purchase. I have no idea what SWA spends for these
options but I imagine if you wanted to calculate the value you could
by looking in their 10K or annuals and doing a little math.

Can the other companies do similarly (thru 3rd parties or however they
trade)?

I agree that an option is not as risky as a futures contract, though
there are also several (complex to me) strategies or tactics in
hedging or "playing" options.

There is no risk to an option unless you are playing in the
derivatives market and trading them. There is a known cost to the
option and a firm date and strike price that does not change
regardless of what the market does.

As I said earlier - SWA is NOT in the business of playing in the
futures market - and most large commercial companies aren't either. A
hedge with a call option is a risk reduction strategy, not an
investment strategy for companies (outside of financial firms, of
course).

al