Oil futures had been trading between about $US50 and $US55 a barrel this year as the Organisation of Petroleum Exporting Countries and 11 other big producers agreed to cut production to suck out the oversupply.
But non-traditional shale oil producers have jumped into the fray, triggering a drilling revival pushing US crude inventories to levels never seen before.
One proxy for which way oil is heading is to look at what airlines - one of the biggest consumers of the fuel - are doing. Unfortunately, signals aren’t crystal clear their either.
After losing billions over the past few years as they locked in prices in a falling market, the carriers are still weighing production cuts by the biggest producers, rising US shale drilling and the impact on oil prices.
Malaysian Airlines is among the few to stick its neck out and call prices at $US70 a barrel by the year-end. The carrier says it has put in an aggressive hedging strategy.
Singapore Airlines, Southeast Asia’s biggest carrier, is adopting a different strategy. It is betting on prices rising over the long-term and has extended its hedging contracts past the decade.
Other than these two, US-based Southwest Airline is the only other active participant in fuel hedging.
Crude prices have rallied from under $US30 a barrel in early 2016 to past $US50 on the back of cuts by producers headed by Organisation of Petroleum Exporting Countries and Russia late last year.
However prices have lost momentum as US drilling accelerates and, on March 8, oil fell the most in a year. That fall meant oil broke below the 100-day moving average, a key technical level for the first time since November.
With jet fuel making up as much a third of an airlines cost base, the carriers try to smooth fuel-price swings by hedging or entering into advance purchase contracts linked to the cost of crude.
They have been burnt before trying to time the market. As oil prices appeared to be stabilising at around $US60 a barrel in 2015, Southwest Airlines and United Continental Holdings said they had added new hedges against a rise in oil prices, only to make more losses as prices slipped further.
For Singapore Airlines, losses from hedging stood at $S365.9 million in the nine months ended December 31.
It now says it has entered into longer-dated Brent hedges with maturity extending to 2022 covering between 33 per cent and 39 per cent of its projected annual consumption at $US53 to $US59 a barrel. It earlier tried to protect itself from fuel vagaries to a maximum of two years.
“Fuel prices have trended upward since the last quarter and are expected to remain volatile as uncertainty lingers around global oil production,” Singapore Air said in a statement last month.
“The group regularly reviews and adapts its fuel hedging policy to manage volatility in fuel prices.”
For the quarter ending March 31, the airline has hedged about 37 per cent of its jet fuel requirements at a weighted average price of $US67 a barrel.
Malaysian Airlines is hedged to about 65 per cent of the current year at just over $6US0 a barrel.
Interest in oil hedging was piqued after OPEC in late 2016 agreed to cut production for the first time in eight years to clear a global glut, triggering a 20 per cent rally in crude prices. Until the agreement was struck, Oil threatened to fall below $US30 a barrel, a level seen in early 2016.
Four months later, oil is struggling to shake off $US50 a barrel and conversation has shifted away from OPEC's production cuts to surging shale production.
Implied volatility, which usually rises when traders bet prices are set to fall, is on the rise. The 25-delta May WTI put options, contracts that give buyers the right to sell futures at a specific price by a certain date, implied volatility climbed to the highest level since January this month.
The demand-supply uncertainty is playing havoc with forecasters’ models. Estimates range from as low as $US30 a barrel to as high as $US70 a barrel for 2017 end.
Latest data showed US crude oil inventories surged to 8.21 million barrels to the highest in weekly data going back to 1982.
Global stockpiles will decline by about 500,000 barrels a day in the first half of this year if OPEC sticks to its pledged cuts and all other market factors remain constant, according to the Paris-based International Energy Agency. That has prompted analysts from Morgan Stanley to Citigroup to forecast rising oil prices.
However, IEA has also doubled forecasts for production growth outside OPEC next year as U.S. shale producers emerge from the downturn. US drilling has risen for the 10th month, based on rigs in operation tabulated by Baker Hughes.
High global inventories and recovering US production will partially offset the effect of production cuts from both OPEC and non-OPEC members in the first half of this year, resulting in a slow return to the long-term equilibrium price forecast of $65 per barrel, credit ratings agency Fitch said.
That brings us back to the question, is it time to lock in fuel prices or wait?
The comments by Mohshin Aziz, an analyst at Maybank Investment Bank, to Bloomberg on Singapore Airlines strategy is a good pointer: “Only time will tell, but I think they did it in a safe manner,” Mohshin said. “It’s only one third. If they are wrong, they’re only partially wrong. They’re not humongously wrong.”
So the message from the cockpit remains “we are expecting some turbulence so please keep you seat belts on”.
Narayanan Somasundaram is an economics and finance reporter formerly with Bloomberg