AviationRegister   E-Xpert Witness Journal

Global developments presenting risks and rewards for the aircraft trading and financing market

Comments are subject to the site's terms of use and do not necessarily reflect the opinion or approval of the publisher, editorial staff or employees. Users whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification. The publisher does not guarantee information accuracy and disclaims all liability.

Headline News was last updated: January 5, 2010

Service

Guide.

M

January 2010

Oil prices ended 2009 at a 14-month high of $80 per barrel vs. the $60 price that airlines need to break even.

November 2009

Fuel prices: Air France-KLM is considering switching from Platts to Argus pricing for its term jet fuel purchases from 2010.

Fuel benchmarking: Argus and Platts compete to set oil and oil products price benchmarks.

Fuel benchmarking: A small discrepancy in benchmarks feeds directly into the price airlines pay for fuel.

Fuel prices: Saudi Arabia state oil company Aramco moved to the Argus sour crude index as the benchmark grade for all crude grades sold to the USA.

Argus is a provider of price assessments, business intelligence and market data on the global coal, electricity, oil, gas, emissions and transportation industries.

Argus was founded in London in 1970 and is a privately held UK-registered company, owned by its employees and the family of its founder.

Platts is headquartered in New York and operates though a network of 17 offices spanning five continents.

Platts’ news and pricing staff of 250 reporters, writers and editors, is the world’s largest independent team of journalists dedicated to the energy industry.

Fuel benchmarking: Jet fuel prices are composed of the benchmark gas oil contract plus a premium as traded on the Intercontinental Exchange (ICE).

ICE is a leading operator of global regulated futures exchanges, clearing houses and over-the-counter (OTC) markets.

ICE serves customers in more than 50 countries and is based in Atlanta, with offices in New York, London, Chicago, Winnipeg, Calgary, Houston and Singapore. www.theice.com

OCTOBER 2009

OPEC predicts that oil consumption will contract 1.8% in 2009 to average 84.05M barrels a day, and then expand 0.6% in 2010 to 84.56M a day.

OPEC is keeping production quotas unchanged to prevent higher prices damaging the recovery.

OPEC member compliance rate with the record output curbs announced in 2008 now stands at 65%.

OPEC expects crude oil demand to remain weak through the end of 2009 as refiner’s lower imports while performing seasonal maintenance before winter.

OPEC says a colder winter would not be sufficient to remove the massive accumulation in distillate stocks, especially as part of its demand may be met by cheaper natural gas.

OPEC raised its global oil demand forecasts for 2009 by 140,000 barrels a day & 2010 by 150,000 barrels a day on expectations the world economy will return to growth.

OPEC (Vienna) controls about 40 percent of worldwide oil supply.

OPEC represents 11 member countries bound by oil output quotas, excluding Iraq.

IEA upgraded its 2010 consumption outlook three times as much as OPEC in a report on Sept. 10.

International Energy Agency (IEA) (Paris) adviser on energy policy to 28 oil-consuming nations

increased its 2010 forecast by 450,000 barrels a day to an average of 85.7M a day.

Oil prices around $70 a barrel are likely to persist says OPEC, and they are about 17% above the price level airlines need to break-even.

Crude oil futures have increased by 53% this year as a result of the economic rebound and OPEC’s implementation of it’s biggest-ever production cut.

Emerging technology: Industry forecasts, based on extrapolation of past trends, do not see electric cars or non-fossil fuel power plants having a big impact for another 20 to 30 years.

Oil: global oil demand was 3M barrels a day lower in Q2 vs. the year earlier period. Demand may not go above that until 2011 says Banc of America Securities-Merrill Lynch.

Oil production: OPEC deliberately cut production by 5M barrels a day, which is more than the drop in global demand, to keep prices in the $60-$80 range. 

Oil power: OPEC members account for 35% of world supply, Russia, a non-member, accounts for 11.5% & co-operates with OPEC.

Oil: Gulf nations that dominate OPEC (a group of 12-nation) have the largest oil reserves and lowest production costs making it easier for them to control global output.

OPEC exports: The value of OPEC crude oil exports increased from $746 Bn in 2007 to 1 Tn in 2008, a 35% increase year over year.

Oil & OPEC reserves: Total proven reserves are 1.027 Tn barrels of oil, a 7.9% increase year over year.

Oil: (August 2009) The Energy Information Administration reported a much larger-than-expected rise of 2.5M barrels in U.S. stockpiles and in distillates stocks, which gained 800,000 barrels and a lower-than forecast 1M draw in gasoline stocks.

Oil price vs. airline stock price! Since their March 9 2009 low, airline stocks have risen 78%, despite jet-fuel jumping almost 60%.

OIL: Prices may fall in the short term as recession and payroll cuts reduce demand.

OIL: Commodity Futures Trading Commission may set limits on the speculation that takes place in oil futures traded on markets that are not regulated (Dark Markets).

Oil speculation, based on the physical withholding of oil from the market, in the form of high inventories is driving up prices says Paul Krugman, New York Times (NYT).

Oil inventories are bulging, with huge amounts held in offshore tankers as well as in conventional storage. NYT

Oil: The assumptions justifying inventory hoarding; that a vigorous recovery is just around the corner, & demand will shoot up, look less reasonable by the day. NYT

Oil price shock takes many forms and has a variety of consequences for airlines:

Demand Shock resulting from demand growth.

•Very high prices driven by very high demand led by the BRIC countries.

•As demand picks up spare production capacity begins to erode

•Oil markets tighten.

Recession Shock:

•Flat and falling demand followed by low prices.

•Oil prices fall (most recently by 2/3rds from their highpoint).

•Spare capacity emerges.

•6...5M b/d of surplus is expected through 2009.

•Equivalent to the output of Iran and Venezuela or the combined exports of Iran, Venezuela and Nigeria.

•A decline in demand leads to a decline in investment and cuts in domestic supply

Aftershock:

•Global economic recovery and high demand returns pushing up prices.

•The lead time to an expansion capacity - as much as 10 years to open a new field

•Global energy production and security related problems lead to another recession.

Rebound:

•Oil prices rebound on signs of optimism in the economy.

•Price responds to expectations of higher prices by producers.

•Saudi Arabia believes the current price should be in the $70 to $80 per barrel of oil range.

•Supported by cuts in oil out as demonstrated by OPEC’s current cut of 4.2M barrels a day in output.

•OPEC says no revision is expected in the near future in oil production quotas.

Fossil fuel, oil, natural gas and coal supply 80% of global energy needs.

•Oil supplies 40% of total energy needs.

USA & Canada hold 15% of proven oil reserves worldwide.

•This does not include American oil shale and Canadian oil sands.

•U.S.A. consumes 20.7M barrels of oil a day in 2007.

OPEC decided on 4.2M b/d production cut in 2008.

Saudi Arabia is the largest OPEC producer

Saudi Arabia is also a member of the Group of 20 industrialized and developing nations

•Wants to keep oil production stable in support of the G-20 April 2009 world economic stimulus plan.

Excess oil supply is waning.

Oil prices are up 35% in two months and in the $60 p/b range, nearing a six month high but well off the $145 p/b high reached in July 2008.

Summer season demand in the USA and Europe will soak up supply.

Oil prices are being supported by:

•speculative trading

•refining problems

•militant interruptions (Iraq/Nigeria)

Production ill-discipline amongst OPEC members (Iran & Venezuela)

•Adherence to three 2008 production cuts is slipping

Drilling investment has been cut due to the economic downturn.

Price volatility is likely to continue through 2010.

Raising fuel-economy standard may cut into the regional aircraft market segment.

•Average fuel-economy standards for a U.S. built vehicle must average 35.5 mpg by 2016, a 38% increase over current standards.

•The Bush administration rule gave automakers until 2020 to meet a 35 mpg standard.

•The increase in fuel efficiency will favor a switch to road travel when compared to the cost of  air transport on distances over 300 miles and may extend that benefit to 414 mile segments.

•The new rule comes on top of an increase in fuel-economy standards announced in March.

•This rule requires automakers to have a fleet average of 37.3 mpg for the 2011 model year

•This 8% increase from today's standard means cars will have an average 30.2 mpg and light trucks will have a 24.1 mpg standard.

•Automakers support the new U.S. rule because it offers one fuel economy and emissions standard for all of the U.S.A.

•The new rule will cut carbon emissions in support of global warming initiatives.

•Much of the saving will come in vehicle weight reductions and an increase in the use of fuel-saving engine, transmission, drive shafts, differentials, and the final drive wheels, hybrids and diesels.

•The upgrades will add $600 to the cost of building a vehicle.

•The new rule will save 1.8Bn barrels of oil equivalent to an estimated 87 days of oil use.

•The new fuel-economy standard is based on gas costing $3.50 a gallon in 2016.

•In part it is designed to encourage drivers to buy smaller, fuel-efficient vehicles.

•A proposal is moving through congress that would give up to $4,500 to people who trade in an older vehicle for a more-fuel-efficient new model.