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$4 Billion Profit Turns to $2.3 Billion Loss

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As recently as April 1st the International Air Transport Association (IATA) whose group consists of 230 members and accounting for 93% of international airline traffic, was projecting a $4 billion profit for the sector in 2008. After crude prices rose to touch $135 and then lingered for weeks above $125 the IATA is now predicting a group loss of $2.3 billion.

That estimate assumes oil prices average $107 for the rest of the year. I think that has a snowball's chance in hell of happening. The IATA says if crude remains in the $130 range and above those losses could exceed $6.1 billion. A 42% jump in oil prices over the past six months and a slowdown in demand due to the credit crisis has been the perfect storm for the airline sector.

More than a dozen carriers have collapsed in the past six months. U.K. Silverjet, a business class airline, was the latest casualty after grounding its planes last week when it ran out of cash. Carriers are being forced into consolidation with extensive cost cutting so far being unable to stem the bleeding. Eventually there will only be nationalized or government subsidized airlines with far fewer routes and sky-high ticket prices. That may not be far off. If Peak Oil occurs on schedule in 2010 we could be looking at $250 per barrel oil and it will be impossible to run an airline profitably without government help and/or massive fare increases.

After tropical storm Arthur faded into the mainland the price of oil collapsed to hit $125.22 at 9:AM Monday morning. After the better than expected ISM was released the price of oil shot up to $129.42 on thoughts that high oil prices were not hurting the U.S. economy. The spike was helped by yet another OPEC official saying there was no need to pump more oil and no need for a special meeting to discuss oil production.

Oil also was lifted by the surge in natural gas back over $12 after unseasonably warm weather produced a greater draw on supplies for electrical cooling.

Russia's oil production fell -0.8% in May and Russia appears to be on track to produce less oil for the full year for the first time since in over a decade. News of the continued production decline also helped spur oil prices. Russia is the worlds second largest oil producer at 9.74 mbpd.

The CFTC probe into trading in crude futures caused speculators to abandon open positions over the last week. For the week ended May-27th there were only 25,867 speculators net long compared to 50,060 for the prior week. This is also well below the record set last July at 127,491. Fear of oversight appears to have tempered the aggressiveness of the bulls.

Jim Brown

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