🚨 Oil alarm bells

History tells us that extreme moves in oil prices tend to either reflect, or cause, big changes in demand. That is, oil going down a lot tells us that demand is bad; oil going up a ton tells us that demand will soon be bad because of how high prices are.

• Outside of crude rebounding from a supply-driven tumble in Q1 2016, every time front-month Brent futures have risen or fallen 30% or more in a month, that’s been accompanied by above-average stock market volatility. In most cases, it’s either coincided with or been soon followed by a recession.

• Yesterday, this was on display pretty much everywhere. Oil-sensitive stocks and companies relying on middle-class spending got crushed early in the day ahead of an announcement that the president would speak to the press after the bell.

• Beyond the usual suspects among the airlines, the pain was widespread, with industries where oil prices are a major input, such as chemical manufacturers, industrial machinery makers, and building products, also getting shellacked.

• More ominous — economically speaking — is the performance of companies catering to America’s middle class, including Macy’s, Kohl’s, and Best Buy. The drop suggests that investors and traders expect the rising cost of fuel to eat away at disposable income, potentially setting the stage for an economic slowdown.

Because oil plays a role in determining the price of everything that’s shipped, as well as how much most people spend filling up their tanks, it has a big macroeconomic impact.

The Takeaway

Whether or not an individual company will face stress from surging oil prices is missing the forest for the trees — or rather, missing the tankers for the empty strait.

Oil price volatility is something that tends to mark a crisis. What’s happening right now is certainly a geopolitical crisis, and could metastasize into an economic and market crisis. It certainly doesn’t have to! But one thing we know about humungous gyrations in oil prices is that they’re fuel for higher correlations, and in times of crisis, correlations tend to go to one.

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Almost a year ago to the day, Southwest Airlines ended its multi-decade practice of hedging fuel costs, becoming the final major US airline to end the exercise.

Now, a historic jet fuel margin squeeze because of the US war in Iran is highlighting the downside risk of that decision for Southwest and every other major American airline.

• Fuel hedging can insulate airlines against volatile swings in fuel prices. You know, like the ones happening right now.  

• The practice famously helped Southwest in particular, including saving it $1.3 billion in 2008 amid a fuel surge during the global financial crisis, and $1.2 billion in 2022 during another spike as Russia invaded Ukraine.

• But the practice can also lock carriers into higher fuel costs during drops in oil prices, which is why carriers like American, United, and Delta stopped doing it about 10 years ago. JetBlue stepped away from hedging in 2021, and Alaska Air suspended its program in 2024.

Now, those decisions are being called into question, with US jet fuel prices up 87% this year, according to the Argus US jet fuel index. Airline shares have been pummeled in March, with carriers shedding billions of dollars in market cap.

The Takeaway

Without hedges, airlines are expected to hike airfares quickly — as they historically do when oil prices surge. Last week, United CEO Scott Kirby said fare increases would “probably start quick.” Getting ahead of criticism around the airline’s lack of hedging, Kirby also said that “no one hedges anymore” and “even if you do, hedging the crack spread is really hard to do.”

More industrywide cost-saving strategies may come soon. The 2008 spike in oil costs coincided with the widespread adoption of bag fees by American carriers. In the years following the 2022 surge, budget carriers shifted heavily into the business of catering toward wealthier travelers who don’t change their plans as quickly when fares climb.

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As crude prices surge, the shock is already showing up at gas stations: the national average price of regular gasoline climbed to $3.48 per gallon on Monday, up nearly $0.50, or 17%, from February 28, when the US and Israeli strikes on Iran began. 

But price increases aren’t landing evenly across the country: Hoosiers and Buckeyes are feeling the most pain. 

See how the price of gas has changed in your state.

• 🎬 Oscars: With less than a week to go before the 98th Academy Awards, backlash has already seen traders on prediction markets react against Timothée Chalamet for Best Actor after a remark made by the young star last month about the relevance of ballet and opera. On March 7, the market-implied probability* of “Sinners” star Michael B. Jordan winning the Best Actor award at the Oscars climbed as high as 51%, while Chalamet’s chances sank to 39%, down from 56% just a day prior.

• ⛽ Gasoline: Markets concerning the price of gas at the end of March have surged upward as already the price at the pump has leapt by nearly $0.50 in about a week. Right now markets are pricing in a 41% chance that gas finishes March above $4 a gallon, a sharp rise from the $2.80 per gallon seen in January. 

*Event contracts are offered through Robinhood Derivatives, LLC — probabilities referenced or sourced from KalshiEx LLC or ForecastEx LLC.

• February existing home sales

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