Low crude gives airlines opportunity to increase jet fuel hedging

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London —
Airlines are topping up their hedging levels in the wake of falling Brent crude, low sulfur gasoil futures and outright jet fuel swap prices, sources say.

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Airlines hedge the majority of their fuel costs against Brent crude but have diversified into ICE low sulfur gasoil futures and jet fuel swaps ahead of the International Maritime Organization’s 0.5% sulfur cap on marine fuels at the start of next year, which expected to tighten the whole middle distillates complex.

Front month ICE LSGO futures were at $542.75/mt at 16:30 London time Thursday, down from a recent high of $665.25/mt on May 16, and the outright front month jet swap was assessed at $588/mt, falling from $657.25/mt on July 11.

LSGO futures fell to a seven-month low Wednesday, with outright jet CIF NWE cargo swap prices at a two-month low, tracking a decline in front month Brent crude futures on demand concerns due to the waning health of the global economy.

Front month Brent crude futures traded at $58.10/b at 12:30 GMT Friday, recovering slightly from $57.48/b at 16:30 London time Thursday, after reaching a recent high of $75.04/b on April 25.

The flat price is “relatively low … nearly the year’s low,” a source said. “I think a lot of airlines have used the recent drop in crude prices to top up their hedging levels … and lock in their fuel prices and thus their margins.”

The source said prices could go lower, given broader fears of a global recession as trade tensions between China and the US continue.

“The flat price is dependent on macro [economic] moves at the moment,” a second source said.

Increased hedging activity in jet fuel swaps was focused on 2020 and a bit on 2021, in addition to some bank flow, according to a third source.

“Some airlines may decide to hedge, but they have their own hedging program, so in theory they should be hedging quite regularly,” a fourth source said. “It depends on the company. If you are going to hedge in a dip you have to be able to predict a dip.”

Airlines tend to base their hedging on what they expect their future demand for jet fuel to be, rather than flat price fluctuations, the source said.

Heading into 2020, the jet market looks a little softer than the rest of the distillates complex with jet CIF NWE cargo differential swaps in a contango of around $4/mt through 2020, partially offsetting a strong backwardation in ICE LSGO futures over the same period of $8/mt Thursday.

Many analysts expect the middle distillates complex to tighten significantly from Q4 2019 as preparations for the implementation of IMO 2020 begin. The pricing in of a slightly weaker jet fuel market could provide a hedging opportunity, or alleviate fears of a markedly stronger jet fuel market for airlines in 2020.

–Emma Jane Thomas, emma.thomas@spglobal.com; Gary Clark, gary.clark@spglobal.com

–Edited by James Burgess, james.burgess@spglobal.com