HENGYUAN derivatives loss in Q1 22' complete clarification

Publish date: Sat, 11 Jun 2022, 02:31 PM

To understand the Derivatives loss reported by Hengyuan, one only needs to understand how Refining Margin Swap hedging takes place. This would be imperative to understand:

Please spend 5 min to understand this simple concept presented under the title 'Example 1 — Fixing Refiner Margins Through a Simple 1:1 Crack Spread' on below link:

The hedging closure is done by making equal transaction as per physical market (buying of physical crude & selling of physical refined oil) but in reverse at the futures which they had gone LONG on crude oil and SHORT on the refined oil earlier. 

One can view the futures similar to stock market where you can go long or short with the need to reverse the transaction in parallel to actual physical transaction. 


Once you understood this, then you are ready for the following presentation that shows the hedging loss or gain on both crude oil and refined oil month after month in Q1 22' and as anticipated for Q2 22'.

Using the same concept, i had incorporated the fact the Russian oil (Ural) is being consumed at 14.7% of the feed throughput as per the information gathered from HY annual report 2021 page 23 and that it is assumed to have lost any market value in Mar 22' when Shell announced it will abruptly stop consuming russian oil.



See the gross profit generated by cash market in blue and the hedging loss / gain generated on the futures market in pale yellow when the long and short position are closed on the following month:

USD - MYR exchange rate used here is 4.25.  The average refined oil price is obtained using average crack spread (refining margin) during the concern month and adding to the crude oil average price during the same period.

From the size of its Refining Margin Swap reported, USD 280 million  in Q4 21' and USD 291 million in Q1 22'. we can expect HY hedging volume to be cleared every month (based on HY sales volume of around RM 1.2 billion every month). As such the hedging gain or loss is realized monthly as refiners typically do.


Market had underestimated the effects of Russian crude:


We can expect that the huge losses caused by the Russian oil embargo will not repeat in Q2 22'. The natural hedging losses (if it all happens) will be very low too ~ RM 100 million as can be seen on the right side of above table.

Readers are encouraged to verify these figures themself and scrutinize these derivation for the benefit of everyone. This attempt to elucidate HY refining business model is by no means assured to be true. However, considering the significant mismatch in pricing of HY with what could be the outcome in Q2 22', it would certainly be worth the effort to give deep thoughts on this.






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For those who cant access the link shared above directly, here it is:

This is crucial to understand with the fact that pure refinery like HY must practise hedging especially when margin is thin.

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.

2 months ago


something to ponder, while it seems to me to have a very straight forward answer, i would like the experts shed their opinion:

If the following variables are unchanging from one quarter to another, will there be repetitive hedging loss or gain for HY?

1) crude oil price unchanging
2) refined oil price unchanging
3) USD - MYR exchange unchanging

what is hedging loss or gain at a particular point in time?

As i understand its a snapshot indication on the effect of the concern variable changing from what was anticipated either favourably or unfavourably between the hedging moment till the time the implications are reported.

once you had shown the hedging loss or gain on the financial report at a particular moment in time and that these variables are unchanging from then on, there will not be hedging loss or gain at a later point in time

when the variables are stable it is simply incomprehensible to me that a refinery can have recurring hedging loss

do correct me if i am wrong

2 months ago


if anyone need me to share the native files (excel) of the table i can share it on messenger in i3, just ping me

2 months ago


@Johnzhang, considering your query i had added some clarification on why the hedging are closed and renewed every month.

From the size of its Refining Margin Swap reported, USD 280 million in Q4 21' and USD 291 million in Q1 22'. we can expect HY hedging volume to be cleared every month (based on HY sales volume of around RM 1.2 billion every month). As such the hedging gain or loss is realized monthly as refiners typically do.

2 months ago


If we see the Refining margin Swap contract value at end of every quarter in 2021, it reflects the typical sales volume you can expect during the mid of the concern qtr at the market pricing of crude oil.

2 months ago


Info suplied by hengyuan management? Or u copy n paste from other site? Kakakaa

2 months ago


Well done. Thank you.

2 months ago


So... Monday Limit down???

2 months ago

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