Oil prices soared in New York overnight, sending airline share prices tumbling. Investors again took shelter in commodities amid a falling US dollar, as financial markets digest the massive US government financial bail-out. The huge spike in oil - up an astonishing USD25 per barrel in intra-day trade - was also partly due to traders closing out positions for October crude delivery.
The more widely traded November contract was less affected, rising 6.4% to USD109.37 per barrel (compared to the 16% spike in the October contract). News of an 11.5% increase in crude imports by China (recovering from a steep fall in Jul-08) also supported the oil price surge.
Extreme volatility in the price of oil is of significant concern to the highly sensitive airline sector. US carrier stocks were battered again yesterday, with American Airlines' parent AMR Corp leading the falls with a 14% drop, while Continental Airlines' shares fell 8.9%, United Airlines fell 12.8% and Delta Air Lines slumped roughly 13%. Southwest Airlines, insulated by its exceptional hedging programme, saw its stock price fall 4.4%.
The Air Transport Association (ATA), the industry trade organisation for the major US airlines, reacted to oil's largest one-day price gain, stating it reaffirms that speculation is playing a "significant role" in driving up the price. President and CEO James May, stated the market's extreme volatility "suggests that speculators, who withdrew tens of billions of dollars from the commodities markets when Congress threatened to tighten oversight of excessive and harmful speculation, breathed a sigh of relief last week when action in the Senate seemed unlikely and returned to the energy markets in full force".
Reflecting the push by financial market regulators to clamp down on short-selling of equities, the ATA has reiterated its calls for a bipartisan approach to "reining in excessive energy speculation", warning that Americans "will pay the price" if oil prices return to or exceed this Summer's record levels.
Asian airline shares are likely to be hit by a wave of oil-related selling today.
The optimism that some airlines could regain profitability as early as next year on lower oil prices could soon evaporate if oil holds above USD120 per barrel. But another swing downwards in the price of oil could be possible if the ‘pain on Wall Street spreads to Main Street' and economies continue to weaken. This would be an even less palatable outcome for many airline industry participants.