There have been several recent announcements from Delta Airlines related to jet fuel and oil trading.
According to Reuters, Delta Air Lines Inc. reported a second quarter loss because it took $561 million in charges for fuel hedges. Part of the loss was taken for mark-to-market adjustments on open hedge contracts.
It appears that Delta has chosen not to apply FAS commodity hedge accounting treatment. Many of the news reports called these derivative purchases “bets” when in fact they are hedges that reduce risk.
If Delta used hedge accounting it would match the loss of open fuel derivative contracts against future jet fuel purchases and not show the loss in the current period. Hedge accounting is extremely complex, and an advanced, auditable software system is required to support the adoption of these procedures.
Separately but related to managing fuel cost and risk, Delta announced that it completed its acquisition of the Trainer Refinery in Pennsylvania through its Monroe Energy subsidiary. Delta will move jet fuel from the refinery to its hub airports in the Northeast. Additional refined products such as gasoline and diesel fuels will be traded for jet fuel in other parts of the country. Delta spent about $12 billion on jet fuel in 2011 and expects to serve 80% of its domestic jet fuel needs from the Trainer refinery and related deals.
Delta is the first airline to own refining capacity. It will be interesting to observe if other airlines follow suit and move to vertically integrate their energy supply chains.
Supplying a refinery with crude oil and trading products requires sophisticated energy trading and risk management (ETRM) software. With volatility seemingly increasing daily in the commodity and crude oil markets, it seems prudent for Delta to invest in a hedge accounting and oil trading and risk management platform.
Four years ago Triple Point acquired INSSINC, the leading commodity hedge accounting software solution, and integrated it into its energy trading and risk management (ETRM) software solution. At that time, Triple Point recognized the need for an integrated commodity management platform that seamlessly integrates all key risk areas.
The new volatility reality demands that all industries with exposure to commodities and energy review their current risk systems to ensure they are appropriately protected.
A combination of persistently low margins and high volatility can spell bad news for refining operations, causing intraday swings in oil prices exceeding their margins. According to an article recently published in Global Technology Forum, this situation is driving greater integration between refinery operations and trading activities within oil companies. It’s no longer good enough to be buying or selling to meet the needs of the refinery – supply traders and marketing personnel are being asked to use their market knowledge to make smarter trading decisions.
According to Viren Doshi, senior vice president, Booz & Co., a more trading-oriented approach has been most prevalent in northwest Europe, the Mediterranean, and the US Gulf Coast. Companies in these regions have recently had to be more flexible to survive low margins and leverage high price volatility in their markets. Independent refineries in particular have been bullish on this approach because of their less complex operations.
Software solutions that can minimize costs and maximize refinery margins by optimizing the entire supply and trading chain have been key to making trading integration easier for refiners. These solutions have the ability to process refinery plans and forecast demand and production information upon which the supply and marketing groups can take action. They also enable plan changes to be immediately visible to the trading group for improved efficiency and productivity. To learn more, read the full article.