Shippers hedging on crude rise, airlines still wary

By Yaw Yan Chong and Chua Baizhen - Analysis

SINGAPORE (Reuters) - Shippers have hastened their fuel hedging since early April as oil's recent rally worried end users that the price of already tightening marine fuel supply will move further against them.

Airlines have so far resisted the move, after many were burned last year from hedging activities at a time crude was sliding from records, along with fears of lower travel demand due to the recession and from the H1N1 flu virus, traders in Asia said.

Utilities, the third sector that leans heavily on managing fuel costs, have seen relatively steady hedging activity.

"More hedgers are entering the market. Not en masse, but we've certainly seen a rise in interest across the consumer spectrum in the last month," Jonathan Kornafel, Asia director of U.S.-based Hudson Capital Energy, said.

Asian fuel oil swap spreads for months further out, in particular the Q3/Q4 and Q4/Q1 timespreads, have been rising in line with crude since the beginning of last month as end users bought actively, traders said.

The correlation between the two timespreads and ICE Brent's front-month closing values between April 1 and midday Monday was a factor of 0.52, Reuters data showed. A factor of 1.0 shows perfect correlation while 0 means the values compared are not related at all.

For a chart on the timespread values vs Brent crude:

here

Fuel oil's Q3/Q4 and Q4/Q1 timespreads were valued at a contango of $5.08 and $7.42 a tonne respectively by 12 a.m. EDT on Monday, well above their closing values at minus $10.08 and $12.25 on April 1.

"Shippers have been steadily buying up the back (end of the curve) for a while now," a derivatives trader said. "There's still on average 20,000-30,000 tonnes of flow a day, for both the front-month contracts and the back-end quarterlies, for the past 2-3 weeks at least."

Traders said buying sentiment, particularly in the prompt timespreads, was backed by a bullish market that saw the front timespreads rise from a contango of $5.00 a tonne over a month ago to the current May/June value at $2.75 in backwardation.

The fuel oil market has been supported by tight supplies for May and June, due to capacity cuts by European refiners and the start of the peak summer demand season in the Middle East.

Helped by hopes of economic and demand recovery, crude has risen three quarters toward $60 a barrel since touching this year's low of $32.70 in January.

AIRLINES CAUTIOUS

But the jet fuel market has seen a sell-off since the late-April, with the flu outbreak weighing on air travel and pulling jet fuel's prompt price spread to gas oil, or the regrade level, into negative domain for the first time in 10 months.