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War falloff: 20% ?


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Oil at $20 a barrel next week? Hmmm. Tell you what? If you believe it's going to twenty, you could get a contract that would pay you a FORTUNE on a drop like that. Why not follow through on it and make big coin?

That drop to $20 won't help Air Canada anyway, as far as I know. Our fuel is very well hedged now. We're paying less for our fuel this year than last. And of course as with any hedge, you're guaranteed a fixed price. You don't effectively pay more if the price goes through the roof, but you don't get to track the price down when it drops either.

To be fair though, I don't know what percentage of our fuel is hedged. There could be a portion of it where we pay market rate, and a drop in price would certainly help in that case. But $20 a barrel next week? Or next month even? I think we'll be lucky, very lucky, to see that price this year.

neo

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After the first quarter, which ends in 12 days, I don't think any Canadian carrier has a big hedge. WJ's big hedge is expiring, AC's first quarter hedge program is much, much greater than the hedge in place after that. So $20 oil would be a significant help. But I think $25-27 is more likely. The Saudis don't want oil at $40, but they also don't want it at $20. The tap can be opened, it can also be shut to put a floor under a falling price.

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Guest Starman

But there is another big player emerging - Russia. Once the transportatin infrastructure is improved, they will be able to open a very big tap indeed. They have more oil than the Saudis and their extraction costs are pretty close too, about $2 - $3 per barrel.

I think we'll see $20 - $22 oil again before Christmas...

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If you know a place where I can buy optimism like that, I could sure use some right now. :)

If Russia can get there oil to market, if the Iraqis don't torch their fields, if Venezuela stabilizes, if war doesn't destabilize the Middle East...

$20-$22 oil by before Christmas? I sure hope you're right Starman, but I'd hate to bet the farm on it.

neo

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Guest Starman

No, don't bet the farm on it, but the global supply of available good quality oil is increasing, so don't be surprised if we do hit $20 oil before the year is out. It would be great for the airlines in many ways, but the flip side is that it is not good for Alberta's economy...

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Guest Stone

According to Milton's conference call with the analysts and media, Air Canada is 45% hedged at $25/barrel for the first quarter. For the remainder of the year Air Canada is only 10% hedged at $25/barrel.

Westjet's hedging also pretty much expires at the end of the first quarter.

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Alberta's economy is no longer overly dependant on oil so prices coming back down to $20 a barrel shouldn't have a major impact. Now, if they went to $20 or lower and STAYED there for many years, then it would certainly put a strain on the provinces finances. I see a better chance of Saddam catching a flight out of Iraq before the deadline than oil prices stabalizing at $20 for several years.

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