Hi John,

just saw this, the figures here are too small to say that its purely caused by the crude oil price fluctuations as we usually see during Shell owner ship time

just $10/brl price change will easily cause USD 33m impact on bottom line

as such some other tools on hedging on their inventory is involved


Posted by Johnzhang > Jun 8, 2022 7:09 AM | Report Abuse

Hi Probability,
There were minimum inventory write down or gain during all the qtrs in 2020 and 2021, except Q1 2022. Here are the numbers :
Inventory (write down)/ Gain :
FY2020 - Q1 : $0, Q2 : $0, Q3: $0, Q4: ($28m)
FY2021 - Q1 : ($4m) , Q2: ($10m), Q3: ($1m) , Q4: $1m

Hi John,

(1) Firstly, if am not mistaken the crack spread you had obtained are purely from gasoline alone, excluding any effects from diesel (gasoil) crack spread which is about 40% of their yield. This means the actual refining margin could be slightly different than reported. Nevertheless, we assume these are representative.

(2) Secondly, we must realise that the cost of production is at least $2.5/brl assuming they sell about 10 m barrels per qtr. This would be the break even average crack spread margin we need.

If market average gross crack spread is say $ 3/brl for 2020, the NET crack spread would be $ 0.5/brl.
...............................


(3) The PBT reported are after the inventory gain / loss inclusion which swings wild easily. For just a $ 10/brl change between reporting period (or between buying and market pricing at the qtr closing date), the inventory gain/loss is:
= 3.3 m barrels (inventory) x $ 10 / brl change
= $ 33 m

to see the effects per barrel, simply divide $ 33m over its sales volume of 10m per qtr
= $33m / 10m brl
= $3.3 / brl


We can see from above (2) and (3) figures that the major factor that will be influencing its PBT is the inventory gain / loss and no longer the market crack spread (its simply too low to have any influence)

For 2021, though the margin is much better at say $7.5/brl, the NET refining margin is about $5/brl and its not too big compared to the inventory effects of $3.3/brl by a mere change of $10/brl in crude oil pricing.


In summary at such low refining margin, and volatile crude oil prices during this period (i believe it is the case in 2020 & 2021), its meaningless to derive any link between observed crack spread during this period and the reported PBT respectively.

You need a relatively bigger crack spread and much stable crude oil pricing to really see the effects on bottom line.




Posted by Johnzhang > Jun 7, 2022 10:43 PM | Report Abuse

I would very much appreciate if you can try to explain the relationship of the quarterly results below using the time lag effect of hedging and crack spread . For me it is just too complex.
FY2020 Pre-tax profit - Q1 :($124 m), Q2 : $0 , Q3: $152m, Q4 : $227m
FY2021 Pre-tax profit - Q1 : $34m, Q2 : ($80m) , Q3: ($56m), Q4: $230m
FY2022 Pre-tax profit - Q1 : $85m

The month end crack spread figures are as below (in the order Jan to Dec) :
FY2020: 5.99, 4.91, (5.22), (3.35), (0.91), 2.36, (1.00) , 1.77, 4.54, 2.82, 1.51, 3.92 (Avg 1.44)

FY2021: 3.51, 6.39, 7.05, 7.34, 5.82, 7.08, 9.71, 7.56, 7.61, 12.83, 7.28, 11.21 (Avg 7.78)
FY2022: 12.42, 13.33, 14.85, 21.01, 26.69. (YTD may avg 17.67)

The above is an example for hedging on refining margin swap that resulted in derivative gain as the crack spread dipped from $17.20 to $13.50.

On the other hand, if the crack spread had risen instead, the loss opportunity for having a higher margin would have reflected as derivative loss.

The above is an example for hedging on refining margin swap that resulted in derivative gain as the crack spread dipped from $17.20 to $13.50.

On the other hand, if the crack spread had risen instead, the loss opportunity for having a higher margin would have reflected as derivative loss.

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

Example 1 — 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.

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

Example 1 — 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.

Refined products if not purchased at singapore hub crack spread locally by Shell, HY is free to sell it elsewhere at market rate

Shell retails locally buys this locally and Govn has to fork out as per subsidy structure

Govn has no way of dictating refined oil price as its free market for HY to sell elsewhere


Posted by cactus81 > Jun 7, 2022 5:13 PM | Report Abuse

https://www.tradingview.com/chart/?symbol=NYMEX%3AGZ1!


Would like to confirm the above is the amount paid by goverment to HY?

See detail derivations here:

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack-spread-hedging

Extract from above:

Just as oil producers and consumers have the ability to hedge their exposure to volatile petroleum prices, refiners have the ability to hedge their exposure as well. In fact, one could argue that refiners face an even greater need to hedge than producers and consumers as their profit margins are based on the price of not one commodity, but at least two and often several: the price of their input (crude oil) as well as their outputs (bunker fuel, heating oil, gasoline, diesel fuel, gasoil, jet fuel, etc.).

In order to mitigate their exposure to crack spread price volatility, many refiners hedge the crack spread by purchasing crude oil futures or swaps and simultaneously selling refined products futures or swaps as the results allows the refiner to lock-in or fix the refining margin.

See detail derivations here:

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack-spread-hedging

Extract from above:

Just as oil producers and consumers have the ability to hedge their exposure to volatile petroleum prices, refiners have the ability to hedge their exposure as well. In fact, one could argue that refiners face an even greater need to hedge than producers and consumers as their profit margins are based on the price of not one commodity, but at least two and often several: the price of their input (crude oil) as well as their outputs (bunker fuel, heating oil, gasoline, diesel fuel, gasoil, jet fuel, etc.).

In order to mitigate their exposure to crack spread price volatility, many refiners hedge the crack spread by purchasing crude oil futures or swaps and simultaneously selling refined products futures or swaps as the results allows the refiner to lock-in or fix the refining margin.

They go Long on crude and Short on refined oil products such that if tail (margin shrunk) by following month they dont lose but if head (margin expanded) they will win on next hedging

Refinery is about ensuring there is profit every month. If they dont hedge - some months could be huge loss if the trend in oil price changes downwards

The below is to help one understand, why i simply just see the difference in crack spread to derive the hedging loss between months
......................................


say in Feb 22' , the below was the pricing:

Crude: 100 $/brl
Avg refined oil: 108 $/brl
Crack spread: 8 $/brl (hedged, meaning they buy crude & sell prod forward - non physical)

in Mar 22' (when physical transaction takes place):

Crude: 105 $/brl
Avg refined oil: 125 $/brl
Crack spread: 20 $/brl

Hedging loss/gain on Crude: 105 - 100 = 5 $/brl
Hedging loss/gain on Refined oil: 108 - 125 = - 17 $/brl
Net hedging loss / gain = - 17 + 5
= - 12 $/brl

The above value is the same as Crack Spread in Feb 22' - Crack spread in Mar 22' : 8 - 20
= - 12 $/brl

Both way you derive the same figure



Posted by probability > Jun 7, 2022 9:29 AM | Report Abuse X

example, say gross margin as per actual crack spread chart is as per below:

Dec 21': 7 $/brl

Jan: 8 $/brl,
Feb: 8 $/brl
Mar: 20 $/brl

Q1 gross profit: 3.5m brl/month x ( 8 + 8 + 20)
Q1 profit after hedging loss gain: 3.5 m brl/mth x ( 7 + 8 + 8)


Apr: 24 $/brl,
May: 24 $/brl
June: 30 $/brl

Q2 gross profit: 3.5m brl/month x ( 24 + 24 + 30)
Q2 profit after hedging loss gain: 3.5 m brl/mth x ( 20 + 24 + 24)

..........

why worry on hedging loss / gain? Its just the effects of lagging 1 month trailing 3 months profit

They go Long on crude and Short on refined oil products such that if tail (margin shrunk) by following month they dont lose but if head (margin expanded) they will win on next hedging

Refinery is about ensuring there is profit every month. If they dont hedge - some months could be huge loss if the trend in oil price changes downwards

The below is to help one understand, why i simply just see the difference in crack spread to derive the hedging loss between months
......................................


say in Feb 22' , the below was the pricing:

Crude: 100 $/brl
Avg refined oil: 108 $/brl
Crack spread: 8 $/brl (hedged, meaning they buy crude & sell prod forward - non physical)

in Mar 22' (when physical transaction take place):

Crude: 105 $/brl
Avg refined oil: 125 $/brl
Crack spread: 20 $/brl

Hedging loss/gain on Crude: 105 - 100 = 5 $/brl
Hedging loss/gain on Refined oil: 108 - 125 = - 17 $/brl
Net hedging loss / gain = - 17 + 5
= - 12 $/brl

The above value is the same as Crack Spread in Feb 22' - Crack spread in Mar 22' : 8 - 20
= - 12 $/brl

Both way you derive the same figure



Posted by probability > Jun 7, 2022 9:29 AM | Report Abuse X

example, say gross margin as per actual crack spread chart is as per below:

Dec 21': 7 $/brl

Jan: 8 $/brl,
Feb: 8 $/brl
Mar: 20 $/brl

Q1 gross profit: 3.5m brl/month x ( 8 + 8 + 20)
Q1 profit after hedging loss gain: 3.5 m brl/mth x ( 7 + 8 + 8)


Apr: 24 $/brl,
May: 24 $/brl
June: 30 $/brl

Q2 gross profit: 3.5m brl/month x ( 24 + 24 + 30)
Q2 profit after hedging loss gain: 3.5 m brl/mth x ( 20 + 24 + 24)

..........

why worry on hedging loss / gain? Its just the effects of lagging 1 month trailing 3 months profit

https://www.tradingview.com/chart/?symbol=NYMEX%3AGZ1!

anyone who is letting go HY now are the greatest loser due to gross misunderstanding on this simple hedging strategy

HY is at the cusp of showing the most extraordinary earnings in Bursa history

and as i had mentioned numerous times, it only requires 13 USD/brl to sustain RM 1 EPS per qtr....

@Johnzhang, please ask if you need any more clarifications

i have explained why they must hedge the full volume of their through put every month as they are pure refinery player without retail kiosk (downstream)

its absolutely wrong not to hedge any small portion of their sales volume as it then implies they are purely gambling on this portion (its a waste of their refining capacity)

you should be happy the higher the crack spread goes instead of worrying on hedging loss

example, say gross margin as per actual crack spread chart is as per below:

Dec 21': 7 $/brl

Jan: 8 $/brl,
Feb: 8 $/brl
Mar: 20 $/brl

Q1 gross profit: 3.5m brl/month x ( 8 + 8 + 20)
Q1 profit after hedging loss gain: 3.5 m brl/mth x ( 7 + 8 + 8)


Apr: 24 $/brl,
May: 24 $/brl
June: 30 $/brl

Q2 gross profit: 3.5m brl/month x ( 24 + 24 + 30)
Q2 profit after hedging loss gain: 3.5 m brl/mth x ( 20 + 24 + 24)

..........

why worry on hedging loss / gain? Its just the effects of lagging 1 month trailing 3 months profit

maturity date is an option you have before which you can realize your hedging gain or loss at per prevailing market crack. You can realize it anytime.

Thats why i say they realize the hedging gain / loss on the following month

thats the reason why they had huge hedging loss in Q1 because of Mar actual margin being same as Feb. i,e they loss the opportunity of the 'rise in margin' in Mar


@John you need to understand that by Apr, their margin is now as per Mar as they had hedge again for the full month throughput

In a nut shell, margin after hedging loss or gain is the trailing 3 months gross margin (lagging by a month)

Please do the maths with sample numbers



Posted by Johnzhang > Jun 7, 2022 8:56 AM | Report Abuse

@Probability , this is what I think too . That means HY is locking in refining margins ( ie crack spread) at the rate they are happy about in Q1 2022 . As crack spread continues to rise , derivative loss from this refining margin contracts suffer huge losses as evidenced in fair value change of financial derivative in Q1 QR.
In this connection, refining margin derivative loss may still be very substantial for Q2 as crack spread has soared much higher since the closing of the 1st Q.
Correct me if I have misunderstood it.


Posted by Sslee > Jun 7, 2022 8:07 AM | Report Abuse

A swap is like a call or put warrant cash settlement on maturity.
So if you do a buy swap for crude oil at USD 100 and at maturity the crude oil market price is USD 130 then the banker will pay you USD(130-100) = USD 30. Gain on the buy swap

Similary if you do a sell swap of you fuel products at USD 100 at maturity the fuel products market price is USD 130 then you pay banker USD(130-100) = USD 30. Loss on this sell swap.
You then record these gain/loss into your P &L account

Before maturity you can record a fair value gain/loss based on your quarter end date crude oil and Fuel product market price.

No one will know on maturity date whether your fair value gain/loss will turn into during maturity date.

Example my Petronm-CY give me fair value gain of 30% now but who will know what it will be during cash settlement maturity date

same way the derivative loss in Q1 22' was Mar 22' gross profit - Feb 22' gross profit

here we assume Jun 22'crack spread as averaging the same as for May 22'

The derivative loss in Q2 22' will be the difference in Gross profit you derive for the 3 months (Apr + May + June) versus the Gross profit you derive for the 3 months (Mar + Apr + May) based on crack spread chart.

The PAT you derive for the 3 months (Apr + May + June) is the gross profit based on (Apr + May + June) from crack spread chart minus the derivative loss above

In simpler words the derivative loss for Q2 22' is:

= Apr 22' gross profit - Mar 22' gross profit




Posted by cstanmyinvest > Jun 7, 2022 12:01 AM | Report Abuse

@Probability, will Hengyuan suffer huge derivative loss in May ( crack spread shot up from below $20 to above $30) just as it did in March ?

There is no fcuking reason for HY to hedge margin at 50% and 50% at market (or whatever 25% / 75%) - its as good as saying that they want to reduce their refining capacity by 50% and be a trader on the balance throughput.

what fcuking logic is this?

Occam's razor - the simplest explanation is always the correct interpretation.

Once you get the picture & its simplicity, you know nothing else can be more correct.

When HY was owned by Shell, they were not pressured to hedge because they sell to their own retail company (kiosk price automatically adjusted as per market pricing)

If HY at such huge refining throughput does not hedge - they may as well be a trader.

(Huge risk of loss if they dont hedge - imagine just after they bought feed stock, crude price crashes as refined oil will drop in tandem.)

PetronM who has a relatively small capacity does not need to hedge as they sell to their won retail Petron Kiosks.

https://www.investment-and-finance.net/derivatives/r/refinery-margin-swap.html#:~:text=A%20commodity%20swap%20which%20allows,the%20spread%20is%20given%20up.

Refinery Margin Swap
.....................

A commodity swap which allows a refiner to hedge against a narrowing spread between crude oil prices and the prices of its refined products. Therefore, the right to profit from a potential widening of the spread is given up. This swap can effectively lock in a margin (known as a crack spread) by paying the floating price of a refined oil product and receiving the floating price of a crude oil input plus the crack spread.

The refinery margin swap is also known as a crack spread swap.

only using this model, you will find a huge derivative loss in Mar 22'to explain the observed derivative loss reported in Q1 22'

If you use any other smaller size contract, the derivative loss cannot be that high

Jan & Feb 22' there was barely change in crack spread to cause significant derivative loss

You need huge contract size that is closed with a big 'opportunity loss'' (derivative loss) in realizing the market crack spread which had expanded by Mar

It has to be monthly hedging as done by all refineries

Mar 22' crack spread is THE ONLY abnormal phenomenon that took place for HY compared to the last 5 years to explain the abnormally high derivative loss reported in Q1 22

all other changes like crude oil price were relatively normal


Posted by probability > Jun 6, 2022 10:13 PM | Report Abuse X

why is it so difficult to understand or accept this model?
....................................

HY is just hedging monthly (full cost & revenue as per market crack spread) so that they secure the margin as they refine and sell.

They close the hedging by next month and hedge again for the next coming month. Their hedging margin lags 1 month from reported crack spread.

At any point of time, their hedging contract value will always be the 1 month swap margin contract which will be their monthly throughput value (3.5m barrels).

HY PAT basically lags 1 month from the crack spread chart.

Q2 PAT will be exactly what we see for the 3 months ( March, Apr & May) instead of (Apr, May and June).

@raider, thank you - it will really benefit your Petron if you do not pollute HY forum with your large banner. Kindly post your findings in PetronM so that its easy for readers to find intelligent notes & discussion

Q1 is distorted by the inventory written down and the way they had used some other derivative tools for inventory (which is completely not related to the refining margin swap).

why is it so difficult to understand or accept this model?
....................................

HY is just hedging monthly (full cost & revenue as per market crack spread) so that they secure the margin as they refine and sell.

The close the hedging by next month and hedge again for the next coming month. Their hedging margin lags 1 month from reported crack spread.

At any point of time, their hedging contract value will always be the 1 month swap margin contract which will be their monthly throughput value (3.5m barrels).

HY PAT basically lags 1 month from the crack spread chart.

Q2 PAT will be exactly what we see for the 3 months ( March, Apr & May) instead of (Apr, May and June).

I see its simply hedging of margin hng33


Refinery Margin Swap
.....................

A commodity swap which allows a refiner to hedge against a narrowing spread between crude oil prices and the prices of its refined products. Therefore, the right to profit from a potential widening of the spread is given up. This swap can effectively lock in a margin (known as a crack spread) by paying the floating price of a refined oil product and receiving the floating price of a crude oil input plus the crack spread.

The refinery margin swap is also known as a crack spread swap.

@hng33, what do you understand by the 'refining margin swap'?

indeed verified and true

Posted by valueguru > Jun 6, 2022 9:44 PM | Report Abuse

I see a lot of wrong crack spread applied in analysing refiner's margin. If the company ONLY sells gasoline, then yes just use the gasoline crack spread but HY sells more than that. For example diesel, most people are not even aware that diesel crack spread has been a lot higher than gasoline; last week reached a high of USD56.55 in asia; way higher than gasoline; diesel is 35.1% from crude processing (annual report pg22) and is adjustable for complex refinery. Same goes for jet fuel (7.1%). It's possible that overall refining could be higher than the gasoline margin most people used. This never happens before but same goes for the war.

hng33, pls enlighten a little more on this..

thks

Posted by hng33 > Jun 6, 2022 9:41 PM | Report Abuse

Refinary margin swap is because hengyuan only produce some euro5 dissel to meet shell demand. Hengyuan source part of dissel end product from other refiner.

By end Q2, hengyuan dissel plant should have capacity to product all euro5 dissel to meet Malaysia policy

The Biden administration has appealed to OPEC and the US shale producers to pump more crude to help lower gasoline prices this year. But even if oil prices were to fall, the US may not have enough refining capacity to the meet petroleum product demand. Refining margins have exploded to historically high levels in recent weeks amid lower product supplies from Russia and China and surging demand for gasoline and diesel.

And adding refining capacity is not easy, especially in the current environment, Wirth said.

“You’re looking at committing capital 10 years out, that will need decades to offer a return for shareholders, in a policy environment where governments around the world are saying: we don’t want these products,” he said. “We’re receiving mixed signals in these policy discussions.”

....

Even with high prices, Wirth is seeing no signs of consumers pulling back.

“We’re still seeing real strength in demand” despite international air travel and Chinese consumption not yet back to their pre-pandemic levels, Wirth said.

US May Never Build New Refinery Even With Surging Gas Prices, Chevron CEO Says

3 June 2022

https://www.bloomberg.com/news/articles/2022-06-03/chevron-ceo-warns-not-to-count-on-new-us-oil-refinery

@rabbit2, my messages no longer going to have any effect- whatever needs to be said and done is over.


I cant give a damn with the forum - as i no longer care on short terms price movement. I can only wait for the results.

HY is conman management - they syphoned all the profit to their parent company

Exactly, i also support PetronM now

welcome cactus81

truth will eventually prevail

Posted by cactus81 > Jun 3, 2022 7:07 PM | Report Abuse

@Probability, those with lower crack, high profit is not layman. They just want cheap entry by misleading true layman investors. Thank for sharing all the information and analysis.

HY basically buys refined oil and converts to crude oil

i think after all the lengthy discussions here, the layman conclusion is: the lower the crack spread the better HY will make profit

so - let us pray for the crack spread to drop to 1.7 USD/brl like in 2020 and oil price to crash to below 10 USD/brl, then HY price will shoot up to RM 17

Its sad & unfortunate that the crack spread is at such depressing state of about 30 USD/brl

Thank you

when you said above 'speculative contract' , i thought its the same as speculative hedging

Posted by Rabbit2 > Jun 3, 2022 4:48 PM | Report Abuse

@Probability
Hedging means hedging, speculating means speculating. I've never seen speculative hedging unless you are saying that the company is switching the % of hedging from time to time, to me it is still hedging.

@Rabbit2, thanks. Good to know there is no element of speculative hedging.

An Introduction to Crack Spread Hedging

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack-spread-hedging

Just as oil producers and consumers have the ability to hedge their exposure to volatile petroleum prices, refiners have the ability to hedge their exposure as well. In fact, one could argue that refiners face an even greater need to hedge than producers and consumers as their profit margins are based on the price of not one commodity, but at least two and often several: the price of their input (crude oil) as well as their outputs (bunker fuel, heating oil, gasoline, diesel fuel, gasoil, jet fuel, etc.). In order to mitigate their exposure to crack spread price volatility, many refiners hedge the crack spread by purchasing crude oil futures or swaps and simultaneously selling refined products futures or swaps as the results allows the refiner to lock-in or fix the refining margin.

The refiner is buying November crude oil and selling December ULSD as refiners generally purchase crude oil for processing in a given month, and subsequently refine and sell the refined products during the following month.

An Introduction to Crack Spread Hedging

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack-spread-hedging

Just as oil producers and consumers have the ability to hedge their exposure to volatile petroleum prices, refiners have the ability to hedge their exposure as well. In fact, one could argue that refiners face an even greater need to hedge than producers and consumers as their profit margins are based on the price of not one commodity, but at least two and often several: the price of their input (crude oil) as well as their outputs (bunker fuel, heating oil, gasoline, diesel fuel, gasoil, jet fuel, etc.). In order to mitigate their exposure to crack spread price volatility, many refiners hedge the crack spread by purchasing crude oil futures or swaps and simultaneously selling refined products futures or swaps as the results allows the refiner to lock-in or fix the refining margin.

The refiner is buying November crude oil and selling December ULSD as refiners generally purchase crude oil for processing in a given month, and subsequently refine and sell the refined products during the following month.

An Introduction to Crack Spread Hedging

https://www.mercatusenergy.com/blog/bid/72741/an-introduction-to-crack-spread-hedging

Just as oil producers and consumers have the ability to hedge their exposure to volatile petroleum prices, refiners have the ability to hedge their exposure as well. In fact, one could argue that refiners face an even greater need to hedge than producers and consumers as their profit margins are based on the price of not one commodity, but at least two and often several: the price of their input (crude oil) as well as their outputs (bunker fuel, heating oil, gasoline, diesel fuel, gasoil, jet fuel, etc.). In order to mitigate their exposure to crack spread price volatility, many refiners hedge the crack spread by purchasing crude oil futures or swaps and simultaneously selling refined products futures or swaps as the results allows the refiner to lock-in or fix the refining margin.

. The refiner is buying November crude oil and selling December ULSD as refiners generally purchase crude oil for processing in a given month, and subsequently refine and sell the refined products during the following month.

@valueguru, yup i am not aware what tools they use (not familiar on these), but the logic of the loss / gain expected based on the crack spread and monthly hedging (as per the article table published) is correct i suppose

Posted by valueguru > Jun 3, 2022 12:43 PM | Report Abuse

@probability. I don't think HY uses futures contract to hedge but rather the option and swap contracts as stated in the financial statements. On the commodity options contracts, HY likely sold a naked call on its refined products and prices went up, losses increase. On the refining margin swap contracts, HY took a fixed against floating margin and as margin went up, the contracts incur net losses. The overall position made has a consistent view of weak commodity prices coupled with weak margins (due to covid weak outlook and before the war). I recommend a useful book Energy Trading
and Risk Management by Iris Mack 2014. You need some basic understanding in derivatives which I think you have. Hope this helps.

to answer why HY do this rolling 1 month hedging..

I think its purely to protect itself from wild oil price fluctuation

imagine it does not hedge to secure margin, say it buys crude at 100 $/brl and within a 1 week it drops to $80/brl (while refined oil follows the same trend and magnitude change), it will be making a loss...

they may as well become an oil trader than doing refinery business without hedging

nicely worded by John.

Now its important to realize & stress that its not the TREND of crack spread that matters for HY....its the ABSOLUTE value of the crack spread that matters as it is for any REFINERY in the world.

There is no need to focus on the Hedging loss or again due to the trend. HY is not making money from the trend.




Posted by Johnzhang > Jun 3, 2022 11:04 AM | Report Abuse

@OTB,
Thanks for your inputs. I think probability yesterday's posting on the hedging effect indicates that HY adopt a rolling one month hedging. As they square off previous month contracts new contracts are entered into. That means they continue to hedge one month forward. If crack spread on the uptrend from April to June qtr (which seem to be the case), isn't HY chasing the tail ?
I agree that HY shall make explosive profit from hedging gain when crack spread stay plateau or dropping over any particular qtr. Those robust qtr(s) will come on assumption that the hedging policy stay the same throughout.

yup, this never happenéd before

i think they did not foresee Ukraine issue that had caused oil price to spike, perhaps they thought odds of downside is more at end of Q4 21

Posted by CharlesT > Jun 3, 2022 10:57 AM | Report Abuse

The catch is in their inventory loss..