So I was thinking about the price of oil

[Rob_Merritt]

Low gas prices are great but I can't help but wonder how many companies were diving into oil futures in the summer to avoid a soft stock market are suddenly going to become unstable. Think about it. All those people and insitutions who bought in early August oil futures were thinking we would be at $200 a barrel by now. We had reports every day that we were in the end of oil times and we would be at $7 a gallon of gas in the us by christmas. I think most people realized that wasn't happening, atleast not in this time frame but someone was buying up oil still in the ground for $147 a barrel. A lot of someones. There has to be some burtal margin calls and whether anyone thinks it was deserved or not, it has to be damaging our economy somehow. I figured we would be below $90 a barrel and $2.99 a gallon of gas by now but there doesn't seem to be a floor.

[Tortilla]

I believe Southwest Airlines and some funds that like to get into commodities will be the only ones hurt by plunging oil prices. The funds for obvious reasons and Southwest because they do a lot of hedging against future fuel prices by locking in prices well in advance with their suppliers. They made out a like a bandit when the oil prices rocketed up, but now they are going to be stuck paying higher prices as the oil prices drop.

[Kool Moe Dee]

I read that other airlines that got into the hedging game late, or at near-peak prices, are going to take big losses on the hedges. The flipside is that since their operating costs will be drastically lower than predicted, their total losses are actually going to be pretty low.

[Robert Sharp]

Why would their operating costs be lower, if they are buying the fuel at the higher prices? What other operating costs will offset that? Do you mean gas for the fuel trucks themselves and such?

[TheTrunkDr]

Why would their operating costs be lower, if they are buying the fuel at the higher prices? What other operating costs will offset that? Do you mean gas for the fuel trucks themselves and such?

They're hedging their bets. The airlines have to buy actual fuel. They choose to invest in oil futures. If the price of oil (and therefore fuel) goes up they recoup some money from the futures investments. If oil drops they pay less for fuel which compensates for the loss on the futures. More likely they'll use the additional money to buy more futures (which would be low) to offset the cost when the price goes back up.