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Saturday, June 13, 2009

Airline:Caught in a pincer

Higher crude oil price assumptions... Our regional oil and gas analyst Itphong
Saengtubtim is raising his crude oil price assumptions by US$15-20/barrel to US$60
in 2009, US$75 in 2010 and US$80 in 2011(Figure 1).
The new price assumptions are based on: (a) continued recovery in global economy;
(b) US dollar weakness; (c) speculators buying commodities; and (d) continued tight
supply from both OPEC and non-OPEC producers.
…and jet fuel prices too. We will eventually factor into our airlines’ earnings models
US$5-10/barrel increases in our jet fuel price assumptions to US$70 in 2009, US$85
in 2010 and US$90 in 2010 (Figure 2).
The size of the revision for jet fuel is lower than the revision for crude oil because of
the sharp reduction in crack spread. Our previous crack spread assumption was
US$20/barrel, which we now trim to US$10. The crack spread has narrowed
significantly from a high of US$45/barrel in mid-2008 to just US$6-7 currently, as
demand for jet fuel sags under the weight of poor aviation demand and capacity
cutbacks by airlines (Figures 3 and 4).

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