Shares of American Airlines (NASDAQ:AAL) jumped as much as 5% in Tuesday trading before falling back to end the day still up a healthy 4.7%.
It's no mystery why. America may run on coffee, but American Airlines runs on jet fuel, and with oil prices plumbing year-long lows, the price of jet fuel looks like it will fall in the future. On Tuesday, WTI crude oil prices fell off a cliff, down 7.4% on the day. Pricier Brent crude took a tumble as well, down 5.6%.
Jet fuel isn't American Airlines' only expense. There are still planes to buy, and crews to pay to fly and maintain them. Also, oil prices are notoriously volatile -- down today, they could rise right back up again in the New Year. That helps to explain why a 7.4% decline in the price of WTI crude oil, for example, doesn't correspond to an immediate 7.4% spike in the value of American Airlines shares. Investors have to hedge their bets against a rebound in the price of dinosaur juice.
Still, even a temporary fall in fuel prices is undeniably good news for American Airlines, and that's why the stock is up today.
It's also worth noting that even if oil prices do start to climb again, they're going to have to climb a whole lot before oil gets as expensive as it was earlier this year. Right now, Oilprice.com reports that with "rising global inventories ... weighing on crude prices," the price of oil in general around the globe is at "one-year lows."
Expert oil analysts such as Citigroup may be predicting a $60 average oil price in 2019, but with the price of WTI hovering close to $46 a barrel, oil is going to have to rise nearly 33% in price to get anywhere near that mark. Judging from investors' reaction to today's news, not many people think we're going to get there anytime soon.