Did anyone lose big when the price of oil dropped?

[Anachronism]

My knowledge of the stock and commodities market is limited but as I understand it when you gamble on futures you can make big money if you are right and lose huge if you are wrong.

Speculators have been blamed for driving up the price of oil, if this is true shouldn't there have been huge loses for some companies when the price of oil dropped? Where there?

[Exapno Mapcase]

The price of oil hit a high in July of around $145 and the low in early September was just over $90. Then it shot up again to $120 and now is at around $108.

So the answer to your question is that it depends on who bought what when, and when as well as if they've sold it. If you bought in July and sold in September you lost a lot of money. If you held on a bit longer you wouldn't have lost very much. And if what you had sold at that time was purchased earlier than May you'd still be ahead.

I'm sure somebody lost some money, but it's doubtful that spectacular wipeouts occurred, and certainly they didn't happen to very many people.

[SmackFu]

United Airlines. They managed to hedge their oil at higher than market prices, proving once again they shouldn't be running an airline, or a business of any sort for that matter.

http://blog.wired.com/cars/2008/09/airlines-hurt-b.html

[Exapno Mapcase]

Note that that article was dated September 19. Since then oil has been running much higher than $98 so while United had some competitive disadvantage for a time (it can't strictly speaking be termed a loss) it may still turn out to be a smart deal.

[MOIDALIZE]

The price of oil has been fairly volatile. It's a good strategy for the airlines to lock in a future price, even though it can occasionally bite them in the butt in the short term. I bet on average they're saving money by hedging.

[cletus]

United Airlines. They managed to hedge their oil at higher than market prices, proving once again they shouldn't be running an airline, or a business of any sort for that matter.

http://blog.wired.com/cars/2008/09/airlines-hurt-b.html

United Airlines is in the business of operating airplanes, not speculating in the futures market! Before you get up there on your high horse maybe you should read up on futures and hedging vs speculating. Do you think it is easy to predict the price of oil? Just buy when it hits bottom and if it keeps going down then don't buy it, right?

I was gonna write a whole post about why companies hedge against price fluctuations but hell with it. It's just, this type of thinking without really knowing what they're talking about (especially by journalists) really annoys me.

[cletus]

Didn't make it in time for the edit.

To OP: I know the CFTC is investigating Optiver Holding (http://www.washingtonpost.com/wp-dyn/content/article/2008/07/24/AR2008072403831.html) for manipulating oil prices upward earlier in the year but I don't know who was left holding the bag when prices dropped.

To answer the question, and remember this is all my personal guesses, I would start with T. Boone Pickens (http://www.usnews.com/blogs/new-money/2008/09/24/pickens-loses-1-billion-on-oil-bets.html) and his funds. $1 billion is only a drop in the bucket though. I would also guess that all those retail investors who jumped in after oil prices was in all the headlines thinking they could make some easy money really got creamed.

[SmackFu]

United Airlines is in the business of operating airplanes, not speculating in the futures market! Considering they're also really awful at operating airplanes, I guess I was optimistic they might be good at something else like speculating.

Southwest seems to be good at both, so it is possible.

[Gorsnak]

Considering they're also really awful at operating airplanes, I guess I was optimistic they might be good at something else like speculating.

Southwest seems to be good at both, so it is possible.

Hedging isn't speculating. The point isn't to buy low and sell high. The point is merely to guarantee that you don't get burned by a price spike in something you have to buy.

[Exapno Mapcase]

Considering they're also really awful at operating airplanes, I guess I was optimistic they might be good at something else like speculating.

Southwest seems to be good at both, so it is possible.

Southwest has a lot of expiring futures contracts. Do you have any evidence that they've done better than locking in future fuel at $111 this year?

You don't seem to understand the point you're trying to make and you're relying far too heavily on a single report that is already obsolete and has no long-term meaning.

[R. P. McMurphy]

United Airlines is in the business of operating airplanes, not speculating in the futures market! Before you get up there on your high horse maybe you should read up on futures and hedging vs speculating. Do you think it is easy to predict the price of oil? Just buy when it hits bottom and if it keeps going down then don't buy it, right?

I was gonna write a whole post about why companies hedge against price fluctuations but hell with it. It's just, this type of thinking without really knowing what they're talking about (especially by journalists) really annoys me.

Your post highly oversimplifies the complexities of running a big business. An entity like United Airlines is in the futures business whether they like it or not.

Read, "The Emperors of Chocolate" (a fascinating read BTW). Mars, a privately held and very secretive company was thought to have at one time been making more money on cocoa futures than on selling candy. The automakers are very dependent on the performance of their finance businesses (GMAC, etc.). Big business isn't a one dimensional enterprise. If you don't have all of your bases covered you are in danger of getting slammed by a competitor that does.

Get off your high horse.

[Jurph]

Southwest has a lot of expiring futures contracts. Do you have any evidence that they've done better than locking in future fuel at $111 this year?

I've got your cite. From Sunday's Detroit Free Press (http://www.freep.com/apps/pbcs.dll/article?AID=/20080928/BUSINESS05/809280454), I have:

With oil hovering about around $100 a barrel, Southwest has come out on top. For 2008, it has locked in the price for about 70% of its jet fuel based on oil priced at $51 per barrel. For 2009, it has locked in 55% of its jet fuel based on that same price.

If they had hedged the other 45% of their fuel at about $180, they would be doing worse than $111... but I don't think jet fuel has cracked that number all year (maybe never). Here (http://blog.wired.com/cars/2008/09/airlines-hurt-b.html) is another look at the sheer magnitude of hedging gains and losses in the airline business.

[Exapno Mapcase]

I've got your cite.

My understanding is that those futures were locked in several years ago, not in 2008. That's good predicting but says nothing about what contracts were available this year, and that was my point. Sorry if that wasn't clear.

Spartydog, I think Cletus is on your side. He was railing against the simplicity of arguments about good or bad hedging rather than the importance of hedging itself. At least, that's how I read it.

[Jurph]

My understanding is that those futures were locked in several years ago, not in 2008. That's good predicting but says nothing about what contracts were available this year, and that was my point.

Aren't the contracts within a given year all going to closely track the market price? The decision in hedging is not "find the best price available today" but "buy or don't buy today's price in bulk." I imagine that when Southwest hedges at $51, the company agreeing to sell them the fuel builds in a margin; this is a little bit negotiable, perhaps, but I would expect them to pay something like 1-3% over the market rate. That lets the seller guarantee a profit.

So then I guess what it comes down to is that Southwest is pretty good at identifying uncharacteristic low prices, grabbing the futures for them in bulk, and then sitting out the market while prices bounce around in the stratosphere.