@valueinvestor888, PetronM shall not be classified into the above simple refinery as it is using Malaysian very light and sweet crude oil

yield of products as per below

https://corporate.exxonmobil.com/-/media/Global/Files/crude-oils/Tapis/Crude_Oil_Tapis_assay_pdf_new.pdf

@extreme scenario of 50% hedging

Rock bottom EPS analysis
.........................

let us assume as extreme conservative scenario where 50% of HY throughput is hedged where they will only reflect hedge margin at 10 USD/brl, with the balance free to capture market margin

1. Diesel at 46% yield, cracks USD 50.36/brl
2. Jet fuel at 7% yield, cracks USD 38.40/brl
3. Gasoline at 35% yield, cracks USD 7.77/brl
3. Rest of product yield at 12%, using Mogas 95 cracks USD 7.77/brl

Gross profit from (Hedged) portion:
..............................

= (10.7 million x 50%) x (10 USD/brl) x (MYR 4.45/USD)
= 238 million MYR .....(1)



Gross profit (UN-HEDGED) portion:
............................

Refining margin/brl:

= (0.46 x 50.4 ) + (0.07 x 38.40) + (0.35 x 7.77) + (0.12 x 7.77)
= (23.18 + 2.70 + 2.72 + 0.93)
= US $ 29.5 / brl

Gross profit:
= (10.7 million x 50%) x (29.5 USD/brl) x (MYR 4.45/USD)
= 702 million MYR ......(2)



Total gross profit (1) + (2)
= 238 + 702
= 940 million MYR

PBT = 840 million
PAT = 638 million
EPS = 2.12

Column: U.S. diesel stocks critically low after failing to recover over

www.reuters.com/markets/commodities/us-diesel-stocks-critically-low-after-failing-recover-over-summer-kemp-2022-09-09/

LONDON, Sept 9 (Reuters) - U.S. inventories of diesel and other distillate fuel oils are now critically low after failing to recover during the summer driving season.

The shortage will keep upward pressure on diesel refining margins and prices unless and until the global economy and distillate consumption slows significantly.

Distillate inventories amounted to just 112 million barrels on Sept. 2, according to high-frequency data published by the U.S. Energy Information Administration (EIA).


Stocks are down from 134 million barrels at the same point in 2021 and at the lowest level for the time of year since 1996 ("Weekly petroleum status report", EIA, Sept. 8).

Stocks have barely recovered from a low of 104 million barrels in early May despite large volumes of crude processing over the summer as refiners met seasonal demand from motorists for gasoline.

The seasonal accumulation of distillate inventories since the end of June has been one of the smallest in the last 30 years, pointing to a persistent underlying shortage (https://tmsnrt.rs/3B26Xbm).

Domestic consumption is muted and running around 200,000 barrels per day (bpd) below the pre-pandemic five-year seasonal average.

But exports remain high as refiners respond to shortages around the world caused by the rapid rebound from the pandemic, disruptions caused by Russia's invasion of Ukraine, and China's coronavirus lockdowns.

Net exports were almost 1.3 million bpd in the five weeks ending on Sept. 2 compared with around 0.8 million bpd at the same point in 2021.

U.S. refiners have a window to boost inventories over the next few weeks by prolonging high crude processing rates for longer after the summer than normal and switching units from max-gasoline to max-distillate mode.

But the shortage of distillate fuel oils is worldwide with stocks at their lowest level for more than a decade in Europe and Asia.

Europe's distillate inventories are down 68 million barrels compared with 2021 at the lowest seasonal level since 2002.

Only a global slowdown in manufacturing and freight transportation will rebuild stocks to more comfortable levels and abate the upward pressure on refinery margins and oil prices.

.......

Keyword - ONLY A 'GLOBAL' SLOWDOWN

Diesel prices are likely to climb again soon

September 8, 2022

https://www.shiplilly.com/blog/sorry-diesel-prices-are-likely-to-climb-again-soon/

MORAL OF THE STORY - the CLUELESS will suspect everything...even himself

MORAL OF THE STORY - the CLUELESS will suspect everything...even himself

JANGAN BAWA SPEKULASI TANPA BUKTI KUKUH lorr!

OTAK TAK PANDAI macam ini la bikin cerita...

JANGAN BAWA SPEKULASI TANPA BUKTI KUKUH lorr!

OTAK TAK PANDAI macam ini la bikin cerita...

ITU FORECASTED TANGGAL 30 JUNE MAH..sekarang FORECAST SUDAH LAIN..

LU TAU BO macam mana bikin forecast cost of hedging reserve??

ITU FORECASTED TANGGAL 30 JUNE MAH..sekarang FORECAST SUDAH LAIN..

LU TAU BO macam mana bikin forecast cost of hedging reserve??

PAKAI OTAK LAH,,,now crack spread is below hedging value,,,your otak can faham how it affects cost of hedging reserve or not?

ADA FAHAM KAH??

PAKAI OTAK LAH,,,now crack spread is below hedging value,,,your otak can faham how it affects cost of hedging reserve or not?

ADA FAHAM KAH??

what risk leh?..that was FORECASTED loss end of June 22 mah!!

now the risk already disappear lorr...

now FORECASTED GAIN liao...

what risk leh?..that was FORECASTED loss end of June 22 mah!!

now the risk already disappear lorr...

now FORECASTED GAIN liao...

ALREADY EXPLAINED how the derivative loss figure in OCI comes about mah!!

NEED A FUNCTIONING BRAIN TO UNDERSTAND Lorrr!!!

..................

Hengyuan had hedged 18 million barrels at avg 12.7 USD/brl refining margin to be effected as it matures at the rate of 0.8 million barrels per month. This is mainly for gasoline.

This is indicated by the Refining margin Swap contract (RMSC) of USS 226 million as can be seen on their financial report.

USD 226 million = USD 18 million x USD 12.7/brl

The fair value changes with respect to the hedged value are reflected under Other Comprehensive Income (OCI) using Cash flow Hedge and Cost of hedging reserve as per IFRS 9:

These are basically forecasted derivative loss against mark-to-market margin in future as of 30th June.
....................

Since the market margin (in futures) as of 30 June 22 was extraordinarily high at $ 32/brl. The expected hedging losses for gasoline going forward was high and reported accordingly.

Hedging loss:

(hedged margin - spot margin) x hedged barrels

= (12.7 USD/brl - avg 32 USD/brl) x 18 million barrels
= - USD 347 million
= - 1.5 Billion MYR

This is not a real loss, but expected 'ópportunity loss' due to hedging and thats why it is not reported in P&L.

The above forecasted losses when occurs in future, it is accompanied by greater gross margin where after offsetting these losses, it will deliver the profit margin in P&L as per the original hedge value of 12.7 USD/brl

As such, these forecasted loss done at end of each financial report would over-turn completely when gasoline margin dives down..

Refer below link which is presently showing $ 5.2/brl in Sep 2022 to $ 4.3 /brl in Dec 2023.

At end of June it was showing avg $ 32/brl

link:
.....

www.cmegroup.com/markets/energy/refined-products/singapore-mogas-92-un...

At end of Sept 22' (for Q3), if the spot margin value above maintains, you have

Hedging gain:

= (12.7 USD/brl - avg 4.5 USD/brl) x 18 million barrels
= USD 147 million
= 650 million MYR

ALREADY EXPLAINED how the derivative loss figure in OCI comes about mah!!

NEED A FUNCTIONING BRAIN TO UNDERSTAND Lorrr!!!

..................

Hengyuan had hedged 18 million barrels at avg 12.7 USD/brl refining margin to be effected as it matures at the rate of 0.8 million barrels per month. This is mainly for gasoline.

This is indicated by the Refining margin Swap contract (RMSC) of USS 226 million as can be seen on their financial report.

USD 226 million = USD 18 million x USD 12.7/brl

The fair value changes with respect to the hedged value are reflected under Other Comprehensive Income (OCI) using Cash flow Hedge and Cost of hedging reserve as per IFRS 9:

These are basically forecasted derivative loss against mark-to-market margin in future as of 30th June.
....................

Since the market margin (in futures) as of 30 June 22 was extraordinarily high at $ 32/brl. The expected hedging losses for gasoline going forward was high and reported accordingly.

Hedging loss:

(hedged margin - spot margin) x hedged barrels

= (12.7 USD/brl - avg 32 USD/brl) x 18 million barrels
= - USD 347 million
= - 1.5 Billion MYR

This is not a real loss, but expected 'ópportunity loss' due to hedging and thats why it is not reported in P&L.

The above forecasted losses when occurs in future, it is accompanied by greater gross margin where after offsetting these losses, it will deliver the profit margin in P&L as per the original hedge value of 12.7 USD/brl

As such, these forecasted loss done at end of each financial report would over-turn completely when gasoline margin dives down..

Refer below link which is presently showing $ 5.2/brl in Sep 2022 to $ 4.3 /brl in Dec 2023.

At end of June it was showing avg $ 32/brl

link:
.....

www.cmegroup.com/markets/energy/refined-products/singapore-mogas-92-un...

At end of Sept 22' (for Q3), if the spot margin value above maintains, you have

Hedging gain:

= (12.7 USD/brl - avg 4.5 USD/brl) x 18 million barrels
= USD 147 million
= 650 million MYR

BECAREFUL OF THE NOT SO PANDAI RAIDER LOH! BRAIN DAMAGED SPAMMER without any substance lorrr!!!!

BECAREFUL OF THE NOT SO PANDAI RAIDER LOH! BRAIN DAMAGED SPAMMER without any substance lorrr!!!!

aiyo @raider...why u so not so pandai?

..think you drinking too much Baijiu leh..

how to make money using hedging instruments alone?

you really need to meditate...take a deep breath liao...

understand how refining margin hedging works first

go through the below and check yourself can you make money just buy playing with the hedging instrument consistently - both on the refined product gasoline and crude without a physical refinery?

..............

Extract from below article:

www.cmegroup.com/education/articles-and-reports/introduction-to-crack-spreads.html

Fixing Refiner Margins Through a Simple 1:1 Crack Spread

In January, a refiner reviews his crude oil acquisition strategy and his potential gasoline margins for the spring. He sees that gasoline prices are strong, and plans a two-month crude-to-gasoline spread strategy that will allow him to lock in his margins. Similarly, a professional trader can analyze the technical charts and decide to “sell” the crack spread as a directional play, if the trader takes a view that current crack spread levels are relatively high, and will probably decline in the future.

In January, the spread between April crude oil futures ($50.00 per barrel) and May RBOB gasoline futures ($1.60 per gallon or $67.20 per barrel) presents what the refiner believes to be a favorable 1:1 crack spread of $17.20 per barrel. Typically, refiners purchase crude oil for processing in a particular month, and sell the refined products one month later.

The refiner decides to “sell” the crack spread by selling RBOB gasoline futures, and buying crude oil futures, thereby locking in the $17.20 per barrel crack spread value. He executes this by selling May RBOB gasoline futures at $1.60 per gallon (or $67.20 per barrel), and buying April crude oil futures at $50.00 per barrel.

Two months later, in March, the refiner purchases the crude oil at $60.00 per barrel in the cash market for refining into products. At the same time, he also sells gasoline from his existing stock in the cash market for $1.75 per gallon, or $73.50 per barrel. His crack spread value in the cash market has declined since January, and is now $13.50 per barrel ($73.50 per barrel gasoline less $60.00 per barrel for crude oil).

Since the futures market reflects the cash market, April crude oil futures are also selling at $60.00 per barrel in March — $10 more than when he purchased them. May RBOB gasoline futures are also trading higher at $1.75 per gallon ($73.50 per barrel). To complete the crack spread transaction, the refiner buys back the crack spread by first repurchasing the gasoline futures he sold in January, and he also sells back the crude oil futures. The refiner locks in a $3.70 per barrel profit on this crack spread futures trade.

The refiner has successfully locked in a crack spread of $17.20 (the futures gain of $3.70 is added to the cash market cracking margin of $13.50). Had the refiner been un-hedged, his cracking margin would have been limited to the $13.50 gain he had in the cash market. Instead, combined with the futures gain, his final net cracking margin with the hedge is $17.20 — the favorable margin he originally sought in January.

aiyo @raider...why u so not so pandai?

..think you drinking too much Baijiu leh..

how to make money using hedging instruments alone?

you really need to meditate...take a deep breath liao...

understand how refining margin hedging works first

go through the below and check yourself can you make money just buy playing with the hedging instrument consistently - both on the refined product gasoline and crude without a physical refinery?

..............

Extract from below article:

www.cmegroup.com/education/articles-and-reports/introduction-to-crack-spreads.html

Fixing Refiner Margins Through a Simple 1:1 Crack Spread

In January, a refiner reviews his crude oil acquisition strategy and his potential gasoline margins for the spring. He sees that gasoline prices are strong, and plans a two-month crude-to-gasoline spread strategy that will allow him to lock in his margins. Similarly, a professional trader can analyze the technical charts and decide to “sell” the crack spread as a directional play, if the trader takes a view that current crack spread levels are relatively high, and will probably decline in the future.

In January, the spread between April crude oil futures ($50.00 per barrel) and May RBOB gasoline futures ($1.60 per gallon or $67.20 per barrel) presents what the refiner believes to be a favorable 1:1 crack spread of $17.20 per barrel. Typically, refiners purchase crude oil for processing in a particular month, and sell the refined products one month later.

The refiner decides to “sell” the crack spread by selling RBOB gasoline futures, and buying crude oil futures, thereby locking in the $17.20 per barrel crack spread value. He executes this by selling May RBOB gasoline futures at $1.60 per gallon (or $67.20 per barrel), and buying April crude oil futures at $50.00 per barrel.

Two months later, in March, the refiner purchases the crude oil at $60.00 per barrel in the cash market for refining into products. At the same time, he also sells gasoline from his existing stock in the cash market for $1.75 per gallon, or $73.50 per barrel. His crack spread value in the cash market has declined since January, and is now $13.50 per barrel ($73.50 per barrel gasoline less $60.00 per barrel for crude oil).

Since the futures market reflects the cash market, April crude oil futures are also selling at $60.00 per barrel in March — $10 more than when he purchased them. May RBOB gasoline futures are also trading higher at $1.75 per gallon ($73.50 per barrel). To complete the crack spread transaction, the refiner buys back the crack spread by first repurchasing the gasoline futures he sold in January, and he also sells back the crude oil futures. The refiner locks in a $3.70 per barrel profit on this crack spread futures trade.

The refiner has successfully locked in a crack spread of $17.20 (the futures gain of $3.70 is added to the cash market cracking margin of $13.50). Had the refiner been un-hedged, his cracking margin would have been limited to the $13.50 gain he had in the cash market. Instead, combined with the futures gain, his final net cracking margin with the hedge is $17.20 — the favorable margin he originally sought in January.

aiyo @raider...why u so not so pandai?

..think you drinking too much Baijiu leh..

how to make money using hedging instruments alone?

you really need to meditate...take a deep breath liao...

understand how refining margin hedging works first

go through the below and check yourself can you make money just buy playing with the hedging instrument consistently - both on the refined product gasoline and crude without a physical refinery?

..............

Extract from below article:

www.cmegroup.com/education/articles-and-reports/introduction-to-crack-spreads.html

Fixing Refiner Margins Through a Simple 1:1 Crack Spread

In January, a refiner reviews his crude oil acquisition strategy and his potential gasoline margins for the spring. He sees that gasoline prices are strong, and plans a two-month crude-to-gasoline spread strategy that will allow him to lock in his margins. Similarly, a professional trader can analyze the technical charts and decide to “sell” the crack spread as a directional play, if the trader takes a view that current crack spread levels are relatively high, and will probably decline in the future.

In January, the spread between April crude oil futures ($50.00 per barrel) and May RBOB gasoline futures ($1.60 per gallon or $67.20 per barrel) presents what the refiner believes to be a favorable 1:1 crack spread of $17.20 per barrel. Typically, refiners purchase crude oil for processing in a particular month, and sell the refined products one month later.

The refiner decides to “sell” the crack spread by selling RBOB gasoline futures, and buying crude oil futures, thereby locking in the $17.20 per barrel crack spread value. He executes this by selling May RBOB gasoline futures at $1.60 per gallon (or $67.20 per barrel), and buying April crude oil futures at $50.00 per barrel.

Two months later, in March, the refiner purchases the crude oil at $60.00 per barrel in the cash market for refining into products. At the same time, he also sells gasoline from his existing stock in the cash market for $1.75 per gallon, or $73.50 per barrel. His crack spread value in the cash market has declined since January, and is now $13.50 per barrel ($73.50 per barrel gasoline less $60.00 per barrel for crude oil).

Since the futures market reflects the cash market, April crude oil futures are also selling at $60.00 per barrel in March — $10 more than when he purchased them. May RBOB gasoline futures are also trading higher at $1.75 per gallon ($73.50 per barrel). To complete the crack spread transaction, the refiner buys back the crack spread by first repurchasing the gasoline futures he sold in January, and he also sells back the crude oil futures. The refiner locks in a $3.70 per barrel profit on this crack spread futures trade.

The refiner has successfully locked in a crack spread of $17.20 (the futures gain of $3.70 is added to the cash market cracking margin of $13.50). Had the refiner been un-hedged, his cracking margin would have been limited to the $13.50 gain he had in the cash market. Instead, combined with the futures gain, his final net cracking margin with the hedge is $17.20 — the favorable margin he originally sought in January.

aiyo @raider...why u so not so pandai?

..think you drinking too much Baijiu leh..

how to make money using hedging instruments alone?

you really need to meditate...take a deep breath liao...

understand how refining margin hedging works first

go through the below and check yourself can you make money just buy playing with the hedging instrument consistently - both on the refined product gasoline and crude without a physical refinery?

..............

Extract from below article:

www.cmegroup.com/education/articles-and-reports/introduction-to-crack-spreads.html

Fixing Refiner Margins Through a Simple 1:1 Crack Spread

In January, a refiner reviews his crude oil acquisition strategy and his potential gasoline margins for the spring. He sees that gasoline prices are strong, and plans a two-month crude-to-gasoline spread strategy that will allow him to lock in his margins. Similarly, a professional trader can analyze the technical charts and decide to “sell” the crack spread as a directional play, if the trader takes a view that current crack spread levels are relatively high, and will probably decline in the future.

In January, the spread between April crude oil futures ($50.00 per barrel) and May RBOB gasoline futures ($1.60 per gallon or $67.20 per barrel) presents what the refiner believes to be a favorable 1:1 crack spread of $17.20 per barrel. Typically, refiners purchase crude oil for processing in a particular month, and sell the refined products one month later.

The refiner decides to “sell” the crack spread by selling RBOB gasoline futures, and buying crude oil futures, thereby locking in the $17.20 per barrel crack spread value. He executes this by selling May RBOB gasoline futures at $1.60 per gallon (or $67.20 per barrel), and buying April crude oil futures at $50.00 per barrel.

Two months later, in March, the refiner purchases the crude oil at $60.00 per barrel in the cash market for refining into products. At the same time, he also sells gasoline from his existing stock in the cash market for $1.75 per gallon, or $73.50 per barrel. His crack spread value in the cash market has declined since January, and is now $13.50 per barrel ($73.50 per barrel gasoline less $60.00 per barrel for crude oil).

Since the futures market reflects the cash market, April crude oil futures are also selling at $60.00 per barrel in March — $10 more than when he purchased them. May RBOB gasoline futures are also trading higher at $1.75 per gallon ($73.50 per barrel). To complete the crack spread transaction, the refiner buys back the crack spread by first repurchasing the gasoline futures he sold in January, and he also sells back the crude oil futures. The refiner locks in a $3.70 per barrel profit on this crack spread futures trade.

The refiner has successfully locked in a crack spread of $17.20 (the futures gain of $3.70 is added to the cash market cracking margin of $13.50). Had the refiner been un-hedged, his cracking margin would have been limited to the $13.50 gain he had in the cash market. Instead, combined with the futures gain, his final net cracking margin with the hedge is $17.20 — the favorable margin he originally sought in January.

Cost of hedging only shows the potential loss / gain on the 'hedged instruments' in the future in OCI, but it does not show the reverse gain / loss on 'hedged items' that negates this as it takes place in parallel in the future....


hedged instruments and hedged items always goes on opposite direction to offset each other - that is the basic fundamentals of hedging.

Cost of hedging only shows the potential loss / gain on the 'hedged instruments' in the future in OCI, but it does not show the reverse gain / loss on 'hedged items' that negates this as it takes place in parallel in the future....


hedged instruments and hedged items always goes on opposite direction to offset each other - that is the basic fundamentals of hedging.

@not so pandai raider...

Understanding the Cost of Hedging

https://www.treasuryandrisk.com/2021/10/13/understanding-the-cost-of-hedging/?slreturn=20220811021228

Why Hedge Performance Is Not the Right Measure of Cost
.......................

Individuals less familiar with hedging may think that the cost of a hedge is equal to the monetary gain or loss upon settlement of the derivative. This is not an accurate assessment, as it ignores the fact that hedging is ultimately meant to reduce risk and uncertainty.

Consider a company that is planning a bond transaction. In one month, the organization will issue a $1 billion, 10-year bond at 3.5 percent. The treasurer is worried that interest rates may rise over the next month, making the bond more expensive than expected, so she decides to partially hedge that risk using $500 million worth of 10-year treasury locks. If rates rise, the derivative will be an asset that offsets the increased interest rate at issuance, reducing the financial impact that market shift has on the company’s new debt.

By contrast, if rates fall, the derivative will become a liability; the bond will be priced better than expected, and the derivative will look like an unnecessary cost. Suppose rates fall by 50 basis points (bps) from the time the hedge is executed until the time the bond is issued. The bond issuance will be executed at 3.0 percent, and the derivative will be a liability of roughly $2.5 million. However, that is only half the story. Amortizing the termination value of the hedge over the life of the financing results in an effective cost of debt of roughly 3.25 percent, which is still better than the original expectation of 3.5 percent.

Some executives facing such a scenario will view the hedge as costly because it ultimately was not needed. This is not the right perspective. The purpose of the hedge was to reduce risk in future outcomes, giving the company greater certainty around cost of capital planning. Think about the opposite scenario: If rates had risen 50 bps instead of falling, the hedge would have been an asset worth roughly $2.5 million, and the effective cost of debt would have been roughly 3.75 percent—higher than the original expectation because only half of the issuance was hedged. In this case, would the treasurer be happy that the hedge was an asset, even if the cost of financing was higher than anticipated?
In both scenarios, the hedge serves its purpose by reducing the potential volatility of future issuance outcomes and narrowing the band of possible issuance rates. By keeping in mind that derivatives are meant to reduce risk, companies can move away from measuring the costs of their hedging programs using gains and losses.

@not so pandai raider...

Understanding the Cost of Hedging

https://www.treasuryandrisk.com/2021/10/13/understanding-the-cost-of-hedging/?slreturn=20220811021228

Why Hedge Performance Is Not the Right Measure of Cost
.......................

Individuals less familiar with hedging may think that the cost of a hedge is equal to the monetary gain or loss upon settlement of the derivative. This is not an accurate assessment, as it ignores the fact that hedging is ultimately meant to reduce risk and uncertainty.

Consider a company that is planning a bond transaction. In one month, the organization will issue a $1 billion, 10-year bond at 3.5 percent. The treasurer is worried that interest rates may rise over the next month, making the bond more expensive than expected, so she decides to partially hedge that risk using $500 million worth of 10-year treasury locks. If rates rise, the derivative will be an asset that offsets the increased interest rate at issuance, reducing the financial impact that market shift has on the company’s new debt.

By contrast, if rates fall, the derivative will become a liability; the bond will be priced better than expected, and the derivative will look like an unnecessary cost. Suppose rates fall by 50 basis points (bps) from the time the hedge is executed until the time the bond is issued. The bond issuance will be executed at 3.0 percent, and the derivative will be a liability of roughly $2.5 million. However, that is only half the story. Amortizing the termination value of the hedge over the life of the financing results in an effective cost of debt of roughly 3.25 percent, which is still better than the original expectation of 3.5 percent.

Some executives facing such a scenario will view the hedge as costly because it ultimately was not needed. This is not the right perspective. The purpose of the hedge was to reduce risk in future outcomes, giving the company greater certainty around cost of capital planning. Think about the opposite scenario: If rates had risen 50 bps instead of falling, the hedge would have been an asset worth roughly $2.5 million, and the effective cost of debt would have been roughly 3.75 percent—higher than the original expectation because only half of the issuance was hedged. In this case, would the treasurer be happy that the hedge was an asset, even if the cost of financing was higher than anticipated?
In both scenarios, the hedge serves its purpose by reducing the potential volatility of future issuance outcomes and narrowing the band of possible issuance rates. By keeping in mind that derivatives are meant to reduce risk, companies can move away from measuring the costs of their hedging programs using gains and losses.

@not so pandai raider...

Understanding the Cost of Hedging

https://www.treasuryandrisk.com/2021/10/13/understanding-the-cost-of-hedging/?slreturn=20220811021228

Why Hedge Performance Is Not the Right Measure of Cost
.......................

Individuals less familiar with hedging may think that the cost of a hedge is equal to the monetary gain or loss upon settlement of the derivative. This is not an accurate assessment, as it ignores the fact that hedging is ultimately meant to reduce risk and uncertainty.

Consider a company that is planning a bond transaction. In one month, the organization will issue a $1 billion, 10-year bond at 3.5 percent. The treasurer is worried that interest rates may rise over the next month, making the bond more expensive than expected, so she decides to partially hedge that risk using $500 million worth of 10-year treasury locks. If rates rise, the derivative will be an asset that offsets the increased interest rate at issuance, reducing the financial impact that market shift has on the company’s new debt.

By contrast, if rates fall, the derivative will become a liability; the bond will be priced better than expected, and the derivative will look like an unnecessary cost. Suppose rates fall by 50 basis points (bps) from the time the hedge is executed until the time the bond is issued. The bond issuance will be executed at 3.0 percent, and the derivative will be a liability of roughly $2.5 million. However, that is only half the story. Amortizing the termination value of the hedge over the life of the financing results in an effective cost of debt of roughly 3.25 percent, which is still better than the original expectation of 3.5 percent.

Some executives facing such a scenario will view the hedge as costly because it ultimately was not needed. This is not the right perspective. The purpose of the hedge was to reduce risk in future outcomes, giving the company greater certainty around cost of capital planning. Think about the opposite scenario: If rates had risen 50 bps instead of falling, the hedge would have been an asset worth roughly $2.5 million, and the effective cost of debt would have been roughly 3.75 percent—higher than the original expectation because only half of the issuance was hedged. In this case, would the treasurer be happy that the hedge was an asset, even if the cost of financing was higher than anticipated?
In both scenarios, the hedge serves its purpose by reducing the potential volatility of future issuance outcomes and narrowing the band of possible issuance rates. By keeping in mind that derivatives are meant to reduce risk, companies can move away from measuring the costs of their hedging programs using gains and losses.

what i have noticed is HY, despite taking premium malaysian crude, its margins are pegged against MOPS

thats why you will see their COGS and Revenue about 10% higher than for brent and weighted avg products pricing

further logistics cost are high to be added on COGS

But charlest wont believe this cracked up story :(

.......

Basically they are saying you need all the stocks listed in the world earnings to decline before diesel price comes down...

not sure even then its crack spread can come down from 50 USD/brl presently to 17 USD/brl like in 2017 Hurricane Harvey...

Basically they are saying you need all the stocks listed in the world earnings to decline before diesel price comes down...

not sure even then its crack spread can come down from 50 USD/brl presently to 17 USD/brl like in 2017 Hurricane Harvey...

Basically they are saying you need all the stocks listed in the world earnings to decline before diesel price comes down...

not sure even then its crack spread can come down from 50 USD/brl presently to 17 USD/brl like in 2017 Hurricane Harvey time...

Diesel prices are likely to climb again soon

September 8, 2022

https://www.shiplilly.com/blog/sorry-diesel-prices-are-likely-to-climb-again-soon/

Column: U.S. diesel stocks critically low after failing to recover over

https://www.reuters.com/markets/commodities/us-diesel-stocks-critically-low-after-failing-recover-over-summer-kemp-2022-09-09/

LONDON, Sept 9 (Reuters) - U.S. inventories of diesel and other distillate fuel oils are now critically low after failing to recover during the summer driving season.

The shortage will keep upward pressure on diesel refining margins and prices unless and until the global economy and distillate consumption slows significantly.

Distillate inventories amounted to just 112 million barrels on Sept. 2, according to high-frequency data published by the U.S. Energy Information Administration (EIA).


Stocks are down from 134 million barrels at the same point in 2021 and at the lowest level for the time of year since 1996 ("Weekly petroleum status report", EIA, Sept. 8).

Stocks have barely recovered from a low of 104 million barrels in early May despite large volumes of crude processing over the summer as refiners met seasonal demand from motorists for gasoline.

The seasonal accumulation of distillate inventories since the end of June has been one of the smallest in the last 30 years, pointing to a persistent underlying shortage (https://tmsnrt.rs/3B26Xbm).

Domestic consumption is muted and running around 200,000 barrels per day (bpd) below the pre-pandemic five-year seasonal average.

But exports remain high as refiners respond to shortages around the world caused by the rapid rebound from the pandemic, disruptions caused by Russia's invasion of Ukraine, and China's coronavirus lockdowns.

Net exports were almost 1.3 million bpd in the five weeks ending on Sept. 2 compared with around 0.8 million bpd at the same point in 2021.

U.S. refiners have a window to boost inventories over the next few weeks by prolonging high crude processing rates for longer after the summer than normal and switching units from max-gasoline to max-distillate mode.

But the shortage of distillate fuel oils is worldwide with stocks at their lowest level for more than a decade in Europe and Asia.

Europe's distillate inventories are down 68 million barrels compared with 2021 at the lowest seasonal level since 2002.

Only a global slowdown in manufacturing and freight transportation will rebuild stocks to more comfortable levels and abate the upward pressure on refinery margins and oil prices.

.......

Keyword - ONLY A 'GLOBAL' SLOWDOWN

Column: U.S. diesel stocks critically low after failing to recover over

https://www.reuters.com/markets/commodities/us-diesel-stocks-critically-low-after-failing-recover-over-summer-kemp-2022-09-09/

LONDON, Sept 9 (Reuters) - U.S. inventories of diesel and other distillate fuel oils are now critically low after failing to recover during the summer driving season.

The shortage will keep upward pressure on diesel refining margins and prices unless and until the global economy and distillate consumption slows significantly.

Distillate inventories amounted to just 112 million barrels on Sept. 2, according to high-frequency data published by the U.S. Energy Information Administration (EIA).


Stocks are down from 134 million barrels at the same point in 2021 and at the lowest level for the time of year since 1996 ("Weekly petroleum status report", EIA, Sept. 8).

Stocks have barely recovered from a low of 104 million barrels in early May despite large volumes of crude processing over the summer as refiners met seasonal demand from motorists for gasoline.

The seasonal accumulation of distillate inventories since the end of June has been one of the smallest in the last 30 years, pointing to a persistent underlying shortage (https://tmsnrt.rs/3B26Xbm).

Domestic consumption is muted and running around 200,000 barrels per day (bpd) below the pre-pandemic five-year seasonal average.

But exports remain high as refiners respond to shortages around the world caused by the rapid rebound from the pandemic, disruptions caused by Russia's invasion of Ukraine, and China's coronavirus lockdowns.

Net exports were almost 1.3 million bpd in the five weeks ending on Sept. 2 compared with around 0.8 million bpd at the same point in 2021.

U.S. refiners have a window to boost inventories over the next few weeks by prolonging high crude processing rates for longer after the summer than normal and switching units from max-gasoline to max-distillate mode.

But the shortage of distillate fuel oils is worldwide with stocks at their lowest level for more than a decade in Europe and Asia.

Europe's distillate inventories are down 68 million barrels compared with 2021 at the lowest seasonal level since 2002.

Only a global slowdown in manufacturing and freight transportation will rebuild stocks to more comfortable levels and abate the upward pressure on refinery margins and oil prices.

.......

Keyword - ONLY A 'GLOBAL' SLOWDOWN

Column: U.S. diesel stocks critically low after failing to recover over

https://www.reuters.com/markets/commodities/us-diesel-stocks-critically-low-after-failing-recover-over-summer-kemp-2022-09-09/

LONDON, Sept 9 (Reuters) - U.S. inventories of diesel and other distillate fuel oils are now critically low after failing to recover during the summer driving season.

The shortage will keep upward pressure on diesel refining margins and prices unless and until the global economy and distillate consumption slows significantly.

Distillate inventories amounted to just 112 million barrels on Sept. 2, according to high-frequency data published by the U.S. Energy Information Administration (EIA).


Stocks are down from 134 million barrels at the same point in 2021 and at the lowest level for the time of year since 1996 ("Weekly petroleum status report", EIA, Sept. 8).

Stocks have barely recovered from a low of 104 million barrels in early May despite large volumes of crude processing over the summer as refiners met seasonal demand from motorists for gasoline.

The seasonal accumulation of distillate inventories since the end of June has been one of the smallest in the last 30 years, pointing to a persistent underlying shortage (https://tmsnrt.rs/3B26Xbm).

Domestic consumption is muted and running around 200,000 barrels per day (bpd) below the pre-pandemic five-year seasonal average.

But exports remain high as refiners respond to shortages around the world caused by the rapid rebound from the pandemic, disruptions caused by Russia's invasion of Ukraine, and China's coronavirus lockdowns.

Net exports were almost 1.3 million bpd in the five weeks ending on Sept. 2 compared with around 0.8 million bpd at the same point in 2021.

U.S. refiners have a window to boost inventories over the next few weeks by prolonging high crude processing rates for longer after the summer than normal and switching units from max-gasoline to max-distillate mode.

But the shortage of distillate fuel oils is worldwide with stocks at their lowest level for more than a decade in Europe and Asia.

Europe's distillate inventories are down 68 million barrels compared with 2021 at the lowest seasonal level since 2002.

Only a global slowdown in manufacturing and freight transportation will rebuild stocks to more comfortable levels and abate the upward pressure on refinery margins and oil prices.

.......

Keyword - ONLY A 'GLOBAL' SLOWDOWN

a good link to understand hedging:

Cash flow hedge accounting - ACCA (SBR) lectures

https://www.youtube.com/watch?v=Drn7hZEPOCc&t=3s

https://www.youtube.com/watch?v=qhuH36aa150

whatever difference in crack secured by hedged instrument and hedged item goes to P&L directly

only the effective portion of the hedged item an hedged instrument goes to OCI (cash flow hedge reserve) before being transferred to P&L when the hedged item physical transaction takes place

example 1:
.........

hedged instrument gain: 10 USD/brl
hedged item loss: 9 USD/brl

ineffective portion: 1 USD/brl gain (immediately recognized under P&L)

effective portion: 9 USD/brl (kept in OCI cash flow hedge till hedged item delivery/transaction is completed to transfer to P&L)


example 2:
..........


hedged instrument loss: 10 USD/brl
hedged item gain: 8 USD/brl

ineffective portion: 2 USD/brl loss (immediately recognized under P&L)

effective portion: 8 USD/brl (kept in OCI cash flow hedge till hedged item delivery/transaction is completed to transfer to P&L)


Posted by BobAxelrod > Sep 11, 2022 11:04 AM | Report Abuse

So, Hedging left is wrong, and right is also wrong??..

Sslee, your advice please....hedged at $20 and price of physical moved up....loss? And if price dropped below $20....also loss??? Then which direction is a win????
Thank you.

yeah, it take years

Posted by tehka > Sep 11, 2022 12:47 AM | Report Abuse

Probability, and I believe that converting a simple refinery to a complex refinery is something that will take years, correct? This affect the diesel supply for many years to come

thats why they are introducing price cap on russian oil instead of complete sanction

Posted by BobAxelrod > Sep 11, 2022 10:47 AM | Report Abuse

Let's just say, Oil price doesn't need to be sky high...just high enough and unreachable to some.. Oil Distributions, channels and supply chains are not going back to as before....sanctions seen to that. Even EU is not afraid of this step. UK is facing extremely high Energy Bills...new and first act for new PM.

Post removed.Why?

exactly - keyword: pray that diesel crack wont dip below 12 USD/brl (2017 hurricane harvey peak was 17 USD/brL)

despite charlest pessimistic outward expressions...his background processors keeps learning...


Posted by CharlesT > Sep 11, 2022 10:22 AM | Report Abuse

Posted by Sslee > 46 seconds ago | Report Abuse

The important thing is by Q4 if HRC cash flow can repay the RM 1.5 billion borrowing and the marked to market derivatives loss is negligible as on 31/12/2022 then most likely the HRC price uptrend can sustain for some time.

Ya ya if only high diesel price becomes a new normal n stay for a long long time (so is Ukraine War) n HY can make EPS RM2 or RM3 for a long long time

Pray 24 hours that it will not plunge like Mogas 92 or Tin or CPO etc etc etc etc

Post removed.Why?

exactly - keyword: pray that diesel crack wont dip below 12 USD/brl (2017 hurricane harvey peak was 17 USD/brL)

despite charlest pessimistic outward expressions...his background processors keeps learning...


Posted by CharlesT > Sep 11, 2022 10:22 AM | Report Abuse

Posted by Sslee > 46 seconds ago | Report Abuse

The important thing is by Q4 if HRC cash flow can repay the RM 1.5 billion borrowing and the marked to market derivatives loss is negligible as on 31/12/2022 then most likely the HRC price uptrend can sustain for some time.

Ya ya if only high diesel price becomes a new normal n stay for a long long time (so is Ukraine War) n HY can make EPS RM2 or RM3 for a long long time

Pray 24 hours that it will not plunge like Mogas 92 or Tin or CPO etc etc etc etc

very true..

Sustainability?
...............

what a state of chronic paranoia due to past volatility on earnings of refinery

one shall talk about sustainability of earnings when stocks are trading above PE 20 may be..or the least PE 10

panicking now for a stock that barely moved up from its historic avg low?

refinery stock like HY only needs 13 USD/brl avg refining margin to deliver EPS above RM 1 consistently

now its averaging above 26 USD/brl

and we dont need RM 1 EPS per qtr to justify current price, even 40 cents consistently would do...

there are too many structural changes GLOBALLY that indicates constraints will remain due to shortage in global refining capacity and takes years (more than 5 years to build a refinery and investors are not keen despite high margin currently) unlike gloves for supply to catch up with demand...

its earnings can certainly be volatile, but the mean avg of the crack is expected to be significantly higher than previous years as intermittent shortage due to refinery maintenance, break down etc is high....

as such the odds of margin spiking intermittently is just too high going forward

this especially so considering russian sanction (which is the core of the structural changes that we are basing here)

keyword: sanctions are expected to last years
............................................

there are no such thing as a business being inherently sustainable without such structural factors...any business including tech stocks can have its margin eroded significantly within a short a time

Why Gasoline margin came down but its not so easy for Diesel?
............................................................

EU refinery are 90% simple type, asians like HY are mainly complex type

for simplicity they product yields are as per below:

keyword note - this output ratio cannot be altered

Simple refinery:
...............

40% Gasoline (crack spread : 7 USD/brl)
20% Diesel (crack spread: 50 USD/brl
10% Jet Fuel and other (crack spread at: 20 USD/brl)
30% Fuel Oil ( crack spread : - 25 USD.brl)

avg margin: 7.3 USD/brl

Complex refinery:
.................

30% Gasoline (crack spread : 7 USD/brl)
50% Diesel (crack spread: 50 USD/brl
18% Jet Fuel and other (crack spread at: 20 USD/brl)
2% Fuel Oil ( crack spread : - 25 USD.brl)

avg margin: 30 USD/brl

Due to good margin in refining in Q2 for all refined products including gasoline, everywhere refinery had increased their output by maximizing utilization rate at 99%..

by July gasoline supply had risen more than demand (user of gasoline have the choice to limit their consumption by say working from home)

but despite refineries squeezing all they can on output, the diesel supply still cannot meet demand (diesel mainly used for transportation and manufacturing industry)

Now at this limit of refining output (intentionally delaying maintenance), the diesel is still short...

results is lower crack spread for gasoline and still high crack spread for diesel...


keypoint:
.........

now, at the above low avg refining margin due to fuel oil, its likely that EU refinery will reduce output if gasoline crack is too low, further reducing diesel availablity

Its like natural mechanism in place to sustain Diesel & Jet fuel margin

unless logistics industry, airlines and manufacturing itself slows down due to high price..its unlikely diesel & Jet fuel crack to come down

thats why its actually good for oil price to come down to sustain business and thus demand for benefit of refineries

Sustainability?
...............

what a state of chronic paranoia due to past volatility on earnings of refinery

one shall talk about sustainability of earnings when stocks are trading above PE 20 may be..or the least PE 10

panicking now for a stock that barely moved up from its historic avg low?

refinery stock like HY only needs 13 USD/brl avg refining margin to deliver EPS above RM 1 consistently

now its averaging above 26 USD/brl

and we dont need RM 1 EPS per qtr to justify current price, even 40 cents consistently would do...

there are too many structural changes GLOBALLY that indicates constraints will remain due to shortage in global refining capacity and takes years (more than 5 years to build a refinery and investors are not keen despite high margin currently) unlike gloves for supply to catch up with demand...

its earnings can certainly be volatile, but the mean avg of the crack is expected to be significantly higher than previous years as intermittent shortage due to refinery maintenance, break down etc is high....

as such the odds of margin spiking intermittently is just too high going forward

this especially so considering russian sanction (which is the core of the structural changes that we are basing here)

keyword: sanctions are expected to last years
............................................

there are no such thing as a business being inherently sustainable without such structural factors...any business including tech stocks can have its margin eroded significantly within a short a time

Why Gasoline margin came down but its not so easy for Diesel?
............................................................

EU refinery are 90% simple type, asians like HY are mainly complex type

for simplicity they product yields are as per below:

keyword note - this output ratio cannot be altered

Simple refinery:
...............

40% Gasoline (crack spread : 7 USD/brl)
20% Diesel (crack spread: 50 USD/brl
10% Jet Fuel and other (crack spread at: 20 USD/brl)
30% Fuel Oil ( crack spread : - 25 USD.brl)

avg margin: 7.3 USD/brl

Complex refinery:
.................

30% Gasoline (crack spread : 7 USD/brl)
50% Diesel (crack spread: 50 USD/brl
18% Jet Fuel and other (crack spread at: 20 USD/brl)
2% Fuel Oil ( crack spread : - 25 USD.brl)

avg margin: 30 USD/brl

Due to good margin in refining in Q2 for all refined products including gasoline, everywhere refinery had increased their output by maximizing utilization rate at 99%..

by July gasoline supply had risen more than demand (user of gasoline have the choice to limit their consumption by say working from home)

but despite refineries squeezing all they can on output, the diesel supply still cannot meet demand (diesel mainly used for transportation and manufacturing industry)

Now at this limit of refining output (intentionally delaying maintenance), the diesel is still short...

results is lower crack spread for gasoline and still high crack spread for diesel...


keypoint:
.........

now, at the above low avg refining margin due to fuel oil, its likely that EU refinery will reduce output if gasoline crack is too low, further reducing diesel availablity

Its like natural mechanism in place to sustain Diesel & Jet fuel margin

unless logistics industry, airlines and manufacturing itself slows down due to high price..its unlikely diesel & Jet fuel crack to come down

thats why its actually good for oil price to come down to sustain business and thus demand for benefit of refineries

@aseng,

the above is the most shortest precise information on OCI i can provide at the moment. You need not go through the youtube video above, but you must understand that there are two transactions needed in parallel for hedging to be 'effective'...

one transaction happens on the futures market & the other in the physical market

every gain they make in the futures market will be a loss in physical market and vice versa - that is how they determine-fixed the margin going forward in advance, i.e hedging

Cash flow hedge & Cost of hedging reserve

Cash flow hedge (CFH) are basically hedged portions of the RMSC which are effective as of 30th June and awaiting respective physical market transaction to take place to offset these hedging losses.

https://www.youtube.com/watch?v=Drn7hZEPOCc&t=3s


Whereas, Cost of hedging reserve (COHR) is a forecast for the balance hedged portion that is yet to be effective (forward portion):

https://www.youtube.com/watch?v=Psy21ZJlCoI

Forward looking Mark-to-market estimate of the difference between the hedged price and the future spot price multiplied by the notional quantity and discounted back to a present value based on a reasonable discount rate.


No matter what the figures are reported on CFH & COHR, they are purely trying to show the greater opportunity lost / gained due to the hedging but the profit contribution remains the same as initially wanted when the hedging was done.

The CFH shows how much 'opportunity for greater profit than the hedged profit' is confirmed loss while COHR shows potential loss if the scenario prolongs indefinitely for the balance notional value.

For every negative value on CFH & COHR that will take place, there will be equally higher gross profit in future physical market transaction where after deducting the hedging loss anticipated, you will report the same hedged margin for gasoline.