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2022-09-11 13:16 | Report Abuse
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/
2022-09-11 13:14 | Report Abuse
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
2022-09-11 13:12 | Report Abuse
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
2022-09-11 13:12 | Report Abuse
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
2022-09-11 11:26 | Report Abuse
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
2022-09-11 11:17 | Report Abuse
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.
2022-09-11 10:56 | Report Abuse
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
2022-09-11 10:49 | Report Abuse
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.
2022-09-11 10:32 |
Post removed.Why?
2022-09-11 10:32 | Report Abuse
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
2022-09-11 10:27 | Report Abuse
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
2022-09-10 23:56 | Report Abuse
very true..
2022-09-10 23:07 | Report Abuse
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
2022-09-10 23:06 | Report Abuse
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
2022-09-10 23:05 | Report Abuse
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
2022-09-10 23:04 | Report Abuse
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
2022-09-10 21:22 | Report Abuse
@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
2022-09-10 20:44 | Report Abuse
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.
2022-09-10 19:21 | Report Abuse
@Aseng,
the below is simplified description for your current reading, i will try to put in even more simpler wordings and post later.
These losses you are seeing in simple terms are just like fair value gain or losses of an asset but it purely shows the change in its value without considering the value of the asset.
These asset HY deals with is not like ordinary property but, hedged margin in futures (with distributed maturity) which is utilized along with physical market sales & purchase transaction in parallel.
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-unleaded-platts-brent-crack-spread-swap-futures.html
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
Posted by Aseng > Sep 10, 2022 3:14 PM | Report Abuse
Probability, I do not what is going on here . I was attracted by the calculated earning 222 per share, but I am perlexed by the unrealized hedging loss of 360 sen per share. can you kindly clarify in a layman language how is the hedging gain/loss can be ignored totally to evaluate the earning potential of hengyuan. it is unfair for the readers to be mislead or misinformed by a good earning with a big paper loss . thank you
2022-09-10 19:21 | Report Abuse
Cash flow hedge & Cost of hedging reserve
Cash flow hedge (CFH) are basically hedge portions of the RMSC which has been liquidated (effective portion) as of 30th June and awaiting (highly probable) respective physical market transaction to take place to offset these hedging losses.
Whereas, Cost of hedging reserve (COHR) is simply the following:
Forward looking Mark-to-market estimate of the difference between the fixed price and the future spot price multiplied by the notional quantity and discounted back to a present value based on a reasonable discount rate.
Even if we assume the RMSC covers complete Gasoline production capacity of 35% yield x 10.6 million, 3.7 million barrels, you are securing the below gross profit after hedging losses or gain.
= 3.7 million x 12.7 USD/brl x 4.45 ex
= 209 million MYR.....(1)
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 209 million / per qtr' 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 (precise reason for the hedging loss forecasted in the first place) in future physical market transaction where after deducting the hedging loss anticipated, you will report the same 209 million for gasoline per qtr.
2022-09-10 18:22 | Report Abuse
yes, for the short term as the 'insiders' were taking profit
long term price will try to reflect the good earnings
Posted by dompeilee > Sep 10, 2022 6:12 PM | Report Abuse
Share price movements are highly unpredictable even when the quarter is predicted/ confirmed to be good because insiders are already in action months in advance(discounting mechanism)
2022-09-10 17:33 | Report Abuse
these derivative effects we are seeing are mainly related to refining margin swap - not the inventory
as such crude oil price movement is insignificant to the derivative loss/gain
2022-09-10 17:11 | Report Abuse
@Mikecyc, FYI below at 50% hedging level
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
2022-09-10 16:53 | Report Abuse
it did not mature, but they can forecast future hedging losses/gain (unrealized) against their hedged crack when it matures later, during the end of Q2 reporting period (30th June) using the futures link i had shared above
Posted by Aseng > Sep 10, 2022 4:44 PM | Report Abuse
now already the month of september , why the hedging matured at the end of Jun still an unrealised loss
2022-09-10 16:48 | Report Abuse
barrels hedged x hedged margin (or crack spread)
Posted by Aseng > Sep 10, 2022 4:37 PM | Report Abuse
one more silly question
what is Refining margin Swap contract (RMSC) of USS 226 million?
how it is related to hedging of the crack spread ?
2022-09-10 16:42 | Report Abuse
@aseng,
firstly it may not even turn out to be a loss but a gain - but whichever occurs the effective profit will be exactly as hedged.
it realized when it matures and followed by physical market transaction at that time
you need go through below to understand how hedging works
(its mandatory to understand the refining margin hedging):
.........................................................
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.
2022-09-10 16:22 | Report Abuse
@Aseng,
the below is simplified description for your current reading, i will try to put in even more simpler wordings and post later.
These losses you are seeing in simple terms are just like fair value gain or losses of an asset but it purely shows the change in its value without considering the value of the asset.
These asset HY deals with is not like ordinary property but, hedged margin in futures (with distributed maturity) which is utilized along with physical market sales & purchase transaction in parallel.
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-unleaded-platts-brent-crack-spread-swap-futures.html
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
Posted by Aseng > Sep 10, 2022 3:14 PM | Report Abuse
Probability, I do not what is going on here . I was attracted by the calculated earning 222 per share, but I am perlexed by the unrealized hedging loss of 360 sen per share. can you kindly clarify in a layman language how is the hedging gain/loss can be ignored totally to evaluate the earning potential of hengyuan. it is unfair for the readers to be mislead or misinformed by a good earning with a big paper loss . thank you
2022-09-10 16:19 | Report Abuse
@Aseng,
the below is simplified description for your current reading, i will try to put in even more simpler wordings and post later.
These losses you are seeing in simple terms are just like fair value gain or losses of an asset but it purely shows the change in its value without considering the value of the asset.
These asset HY deals with is not like ordinary property but, hedged margin in futures (with distributed maturity) which is utilized along with physical market sales & purchase transaction in parallel.
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-unleaded-platts-brent-crack-spread-swap-futures.html
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
Posted by Aseng > Sep 10, 2022 3:14 PM | Report Abuse
Probability, I do not what is going on here . I was attracted by the calculated earning 222 per share, but I am perlexed by the unrealized hedging loss of 360 sen per share. can you kindly clarify in a layman language how is the hedging gain/loss can be ignored totally to evaluate the earning potential of hengyuan. it is unfair for the readers to be mislead or misinformed by a good earning with a big paper loss . thank you
2022-09-10 16:11 | Report Abuse
@aseng,
the forecasted losses or gain becomes zero at the end of maturity, because the hedged barrels remaining becomes zero (utilized - already accounted in P&L) by end of maturity.
2022-09-10 16:04 | Report Abuse
@Aseng,
the below is simplified description for your current reading, i will try to put in even more simpler wordings and post later.
These losses you are seeing in simple terms are just like fair value gain or losses of an asset but it purely shows the change in its value without considering the value of the asset.
These asset HY deals with is not like ordinary property but, hedged margin in futures (with distributed maturity) which is utilized along with physical market sales & purchase transaction in parallel.
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
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
Posted by Aseng > Sep 10, 2022 3:14 PM | Report Abuse
Probability, I do not what is going on here . I was attracted by the calculated earning 222 per share, but I am perlexed by the unrealized hedging loss of 360 sen per share. can you kindly clarify in a layman language how is the hedging gain/loss can be ignored totally to evaluate the earning potential of hengyuan. it is unfair for the readers to be mislead or misinformed by a good earning with a big paper loss . thank you
2022-09-10 14:17 | Report Abuse
@stockwin, in my opinion the likely strongest factor are the below two:
1) Majority - the greater market do not understand Cash Flow Hedge and Cost of hedging reserve as reported for a refinery who does refining margin swap contract under IFRS 9. These are forecasted derivative loss against mark-to-market margin in future as of 30th June.
Of course the market margin (in futures) as of end June 22 is extraordinarily high and thus you expect high hedging losses for gasoline going forward. But this over-turns completely when gasoline margin dives by end of July...
2) Market has a wrong perception on refining margin by linking the recent dive in Gasoline crack spread (before Q2 results) with HY complex refinery margin thats largely contributed by Diesel & Jet fuel
Posted by stockwin > Sep 10, 2022 12:18 PM | Report Abuse
Why is Hengyuan head south despite an explosive set of Q2 2022 result?
Imagine an EPS of RM222.49 per quarter and yet the share price tank instead of going limit up! I believe the reasons for the dismal share performance are :
1. The investing public are not convinced of the sustainability of its profit.
2. The monster RM1 Billion "other comprehensive Income /expense " item in the P&L which very few understand and very difficult to be convinced.
3. The worry in the investors mind is that the Q3 2022 PAT could be RM3, but the monster in 2 above could swell to RM2 billion? At end of the day the high EPS might not be enough to cover the monster item in 2 above.
4. No IB wants to touch the stock. Not even one is covering the stock now !
5. I am told we have sifu here who is a remisier is unable to convinced his own broking house to cover the stock. How is he going to convinced others to buy this Gem ??
6. The promoters are arguing with a wall of non believers who have differing views and seems to have different agenda.
7. The company is not interested to engage the shareholders and the investor relationship department is non existence.
8. To be fair , the overall market is shitty, and any good stock also face some kind of selling pressure.
Perhaps it is a blessing in disguise for the believers and knowledgeable to collect at cheaper prices and wait for another explosive set of result? Hopefully Q3 2022 PAT will silent all critics ? Meanwhile , hang on to the stock until end of November for a happy 2023.
2022-09-10 14:15 | Report Abuse
The crises have a high potential for contagion across the globe
Brazil is another country beginning to feel the pressure of diesel shortages. Petrobras, the state-owned oil company, has warned of shortages unless the company was allowed to sell its fuels at market prices rather than subsidized rates that encourage consumption. If the traditional suppliers cannot meet the demand and there is a continued squeeze on Russian supplies, it makes for a potentially critical situation. The geopolitical context is unsuitable for turning to Russia and its associates as relief measures. Europe is also wary of its continued energy reliance on Russia, which has hampered its anti-Russia strategy in the wake of the invasion of Ukraine.
Meanwhile, the major consumers of diesel are demanding its steady supply despite the challenges in the market today. The economic recovery in the post-Covid 19 era is bound to be problematic due to the increasing demand for diesel beyond the expectations of a downturn. Economies require diesel to run, and the supply is not doing the trick. The expectations of a relief phase when sanctions against Russia are eased are not likely to come until 2023. This makes a grim reading for those in the logistics and transportation business and ordinary consumers that rely heavily on diesel.
Wrapping up
A combination of a supply squeeze and demand expansion means that diesel is in short supply. Even more worrying is the reality that the current state of the market is not likely to ease until next year. Russia is embargoed by much of Russia, and the USA must think about its domestic needs when harvests begin in the Midwest. In addition, some South American countries are rethinking their price controls on diesel and other fuels to stem demand. Meanwhile, African countries are facing civil strife and significant logistical problems due to the shortage of this essential fuel. The post-Covid 19 era is bringing new economic and political challenges that will require strong policy interventions in the medium and long run
2022-09-10 14:15 | Report Abuse
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/
Cost and viability implications for the logistics industry
There are indicators that the diesel price crisis is ongoing. Such indicators belie the expectations that the economy is slowing down. Instead, demand for diesel is increasing. Some countries are already grappling with a diesel shortage. For example, many European countries are rushing to secure diesel deals because of the embargo placed on Russian barrels. As the harvest season comes to the US in the Midwest, demand for diesel is bound to rise even further. It may be that the suppliers must play a balancing act between meeting a domestic need and catering to international demand.
Diesel as an essential fuel of economic activity
John Kemp of Reuters has indicated in his oil-buying periodical that institutional traders and hedge funds are buying diesel contracts at some of the fastest rates since November 2020. In real terms, this means 9 million barrels are added to holdings. Bloomberg indicated that the demand for US diesel hit the highest level in the last half-decade. The winter is likely to bring even more demand. Indeed, the US exports of diesel reached an all-time high just last month. The biggest destinations of these exports are Europe and South America.
Other countries are putting protective mechanisms to ensure their supply of diesel. For example, India has placed exportation limits on diesel based on concerns about the adequacy of domestic supplies. Additionally, diesel from Russia has been shunned by mainstream Europe due to the existing sanctions regime that emanated from the invasion of Ukraine. That embargo will not likely end before the current year’s close. Even though there have been diesel shortages before, this one is gathering much publicity.
Government action to mitigate the risks of diesel shortages
An European Petroleum Refiners Association executive indicated at the beginning of the year that most governments were aware of the link between GDP performance and access to diesel. This was in response to the sanctions against Russia when some skeptics were worried about unintended consequences such as the current scarcity of diesel. This is no idle speculation since Russia remains the largest supplier of diesel to the European Union. It is estimated that Europe imports an average of 750,000 barrels every day from Russia, a matter of necessity given the freight transportation, heavy industry, and economic impetus.
Setting the sanction aside for the moment, the diesel market has generally experienced a much faster demand rebound than supply growth following the Covid-19 pandemic. That pattern was reflected in the market for crude oil. Some experts have noted that the demand growth has slowed down recently on the back of an expectation of a global downturn. This would make sense given the central bank rate increments and inflationary pressures discouraging buyers. However, that pattern only lasted for a relatively brief period to be replaced by an even greater demand for diesel.
An inventory that is lacking in reliability and completeness
A columnist for Reuters has noted that US crude oil inventories were failing to fully recover, despite the fuel price inflation. The implication is that the tightness of the fuel markets and the consequent price elevations will likely continue for the rest of the year. The Department of Energy in the USA reported this was that US oil inventories had fallen to their lowest levels since 1985. Indeed, the strategic petroleum reserve now stands at only 469.9 million barrels. As a result, the problems and worries are spreading to the rest of the world.
Some African countries, for example, have reported such shortages in fuel and drivers, impacting the supply chain in a myriad of ways. The Central African Republic is a case in point. Here, humanitarian organizations that have been active in the country recently have scaled back their engagement. A shortage of diesel has been partly blamed for this withdrawal. Cameroon is another case that has had to deal with street protests over dwindling fuel supplies and the inevitable soaring prices.
2022-09-10 13:35 | Report Abuse
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
2022-09-10 13:35 | Report Abuse
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 their 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
2022-09-10 12:38 | Report Abuse
sorry charlest, bz with my promotion activity..will get to you if you have intellectual queries like you had asked earlier - why gasoline margin can drop but not diesel? he he
2022-09-10 12:37 | Report Abuse
@stockwin, in my opinion the likely strongest factor are the below two:
1) Majority - the greater market do not understand Cash Flow Hedge and Cost of hedging reserve as reported for a refinery who does refining margin swap contract under IFRS 9. These are forecasted derivative loss against mark-to-market margin in future as of 30th June.
Of course the market margin (in futures) as of end June 22 is extraordinarily high and thus you expect high hedging losses for gasoline going forward. But this over-turns completely when gasoline margin dives by end of July...
2) Market has a wrong perception on refining margin by linking the recent dive in Gasoline crack spread (before Q2 results) with HY complex refinery margin thats largely contributed by Diesel & Jet fuel
Posted by stockwin > Sep 10, 2022 12:18 PM | Report Abuse
Why is Hengyuan head south despite an explosive set of Q2 2022 result?
Imagine an EPS of RM222.49 per quarter and yet the share price tank instead of going limit up! I believe the reasons for the dismal share performance are :
1. The investing public are not convinced of the sustainability of its profit.
2. The monster RM1 Billion "other comprehensive Income /expense " item in the P&L which very few understand and very difficult to be convinced.
3. The worry in the investors mind is that the Q3 2022 PAT could be RM3, but the monster in 2 above could swell to RM2 billion? At end of the day the high EPS might not be enough to cover the monster item in 2 above.
4. No IB wants to touch the stock. Not even one is covering the stock now !
5. I am told we have sifu here who is a remisier is unable to convinced his own broking house to cover the stock. How is he going to convinced others to buy this Gem ??
6. The promoters are arguing with a wall of non believers who have differing views and seems to have different agenda.
7. The company is not interested to engage the shareholders and the investor relationship department is non existence.
8. To be fair , the overall market is shitty, and any good stock also face some kind of selling pressure.
Perhaps it is a blessing in disguise for the believers and knowledgeable to collect at cheaper prices and wait for another explosive set of result? Hopefully Q3 2022 PAT will silent all critics ? Meanwhile , hang on to the stock until end of November for a happy 2023.
2022-09-10 12:36 | Report Abuse
@stockwin, in my opinion the likely strongest factor are the below two:
1) Majority - the greater market do not understand Cash Flow Hedge and Cost of hedging reserve as reported for a refinery who does refining margin swap contract under IFRS 9. These are forecasted derivative loss against mark-to-market margin in future as of 30th June.
Of course the market margin (in futures) as of end June 22 is extraordinarily high and thus you expect high hedging losses for gasoline going forward. But this over-turns completely when gasoline margin dives by end of July...
2) Market has a wrong perception on refining margin by linking the recent dive in Gasoline crack spread (before Q2 results) with HY complex refinery margin thats largely contributed by Diesel & Jet fuel
Posted by stockwin > Sep 10, 2022 12:18 PM | Report Abuse
Why is Hengyuan head south despite an explosive set of Q2 2022 result?
Imagine an EPS of RM222.49 per quarter and yet the share price tank instead of going limit up! I believe the reasons for the dismal share performance are :
1. The investing public are not convinced of the sustainability of its profit.
2. The monster RM1 Billion "other comprehensive Income /expense " item in the P&L which very few understand and very difficult to be convinced.
3. The worry in the investors mind is that the Q3 2022 PAT could be RM3, but the monster in 2 above could swell to RM2 billion? At end of the day the high EPS might not be enough to cover the monster item in 2 above.
4. No IB wants to touch the stock. Not even one is covering the stock now !
5. I am told we have sifu here who is a remisier is unable to convinced his own broking house to cover the stock. How is he going to convinced others to buy this Gem ??
6. The promoters are arguing with a wall of non believers who have differing views and seems to have different agenda.
7. The company is not interested to engage the shareholders and the investor relationship department is non existence.
8. To be fair , the overall market is shitty, and any good stock also face some kind of selling pressure.
Perhaps it is a blessing in disguise for the believers and knowledgeable to collect at cheaper prices and wait for another explosive set of result? Hopefully Q3 2022 PAT will silent all critics ? Meanwhile , hang on to the stock until end of November for a happy 2023.
2022-09-10 12:32 | Report Abuse
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
2022-09-10 12:32 | Report Abuse
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
2022-09-10 12:22 | Report Abuse
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
2022-09-10 12:21 | Report Abuse
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
2022-09-10 12:16 | Report Abuse
someone wasting time for futile effort so that price will go up for him to gain vs someone spending time discouraging refuting another's opinion that it will go up...
i wonder who is really wasting time..
really wonder leh..charlest entertainment is not really about making money but commenting on i3 i think...LOL
2022-09-10 12:03 | Report Abuse
Truth cannot be suppressed very long, the earlier one investigates and verify what is the truth the more upper hand one will have
the longer one waits the higher the odds are for others to find out ahead of you..
....
HEDGE ACCOUNTING & how it is reported on OTHER COMPREHENSIVE INCOME (OCI)
https://www.youtube.com/watch?v=w5P_M9fWqGg
The above simple example for ORANGES can be viewed as CRUDE OIL for HY where the hedging is done with the intention of going LONG (the higher the future price, the higher the gain)
For refined products hedge, it is for going SHORT, the higher the future price, the greater the loss.
The net effect of the above two is what reported by HY under their OCI.
The Cash Flow Hedge (CFH) in OCI shows the hedging gain / loss for the hedged position which are closed, but the corresponding physical market transaction (change in ownership of the goods) is yet to take place to deliver the available market gross profit which is then offset by this hedging gain / loss on CFH to give the P&L exactly as it has been hedged initially.
The Cost of Hedging Reserve (COHR) on the other hand shows the hedging gain / loss for all the balance hedged position (yet to be closed) from the notional amount (refining margin swap contract RMSC), where the corresponding physical market transaction will take place within the maturity period (next 24 months) assuming the hedging positions are closed as per current spot rate.
As such, COHR is a highly hypothetical figure that changes significantly as per the market spot price of the commodity (mark-to-market) when the financial reporting period is closed.
............
Now that the refined oil products price (gasoline) had significantly retreated from the peak of 30th June, if it remains the same till end of Sept, Q3 will report huge gain on OCI
If prices of refined products relative to crude (the crack spread) are back to Q1 22, 30th Mar level, cost of hedging reserve shall be exactly back to the figure reported in Q1 22 results for Q3 22.
2022-09-10 12:03 | Report Abuse
Truth cannot be suppressed very long, the earlier one investigates and verify what is the truth the more upper hand one will have
the longer one waits the higher the odds are for others to find out ahead of you..
....
HEDGE ACCOUNTING & how it is reported on OTHER COMPREHENSIVE INCOME (OCI)
https://www.youtube.com/watch?v=w5P_M9fWqGg
The above simple example for ORANGES can be viewed as CRUDE OIL for HY where the hedging is done with the intention of going LONG (the higher the future price, the higher the gain)
For refined products hedge, it is for going SHORT, the higher the future price, the greater the loss.
The net effect of the above two is what reported by HY under their OCI.
The Cash Flow Hedge (CFH) in OCI shows the hedging gain / loss for the hedged position which are closed, but the corresponding physical market transaction (change in ownership of the goods) is yet to take place to deliver the available market gross profit which is then offset by this hedging gain / loss on CFH to give the P&L exactly as it has been hedged initially.
The Cost of Hedging Reserve (COHR) on the other hand shows the hedging gain / loss for all the balance hedged position (yet to be closed) from the notional amount (refining margin swap contract RMSC), where the corresponding physical market transaction will take place within the maturity period (next 24 months) assuming the hedging positions are closed as per current spot rate.
As such, COHR is a highly hypothetical figure that changes significantly as per the market spot price of the commodity (mark-to-market) when the financial reporting period is closed.
............
Now that the refined oil products price (gasoline) had significantly retreated from the peak of 30th June, if it remains the same till end of Sept, Q3 will report huge gain on OCI
If prices of refined products relative to crude (the crack spread) are back to Q1 22, 30th Mar level, cost of hedging reserve shall be exactly back to the figure reported in Q1 22 results for Q3 22.
2022-09-10 11:52 | Report Abuse
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
2022-09-10 11:25 | Report Abuse
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
Stock: [HENGYUAN]: HENGYUAN REFINING COMPANY BERHAD
2022-09-11 13:20 | Report Abuse
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...