since all these news are out , market might have already priced in these info...we never know


Posted by skoh888 > Jun 18, 2022 9:15 PM | Report Abuse

I do feel that crude oil will eventually go below USD 100 per barrel with another 75 basis rate hike in July. Just wondering if any stocks will still thrive if we do go into a recession. Maybe keeping cash until there really is blood on the streets?

your observation which i believe is commonly shared by majority of investors including uncle Koon is precisely the reason why HY is at such depressed price

i can put my head on chopping board that HY gross profit will not run away from the reported crack spread data

one simple proof is HY gross profit in Q1. It tallies with the crack spread data.

The derivative loss is contributed by the hedging process which causes its its gross profit to lag by 1 month.

If only they did not use russian oil, their PAT would be reflecting crack reported for Dec, Jan & Feb in Q1 22 lagging by a month.



Posted by Want2MakeMoney > Jun 18, 2022 9:07 PM | Report Abuse

I also want to see Heng Yuan to make good profit in Q2. On one hand think high crack will logically translate to high profit, but if I see past performance, it seems like there is no correlation. in Q3 and Q4 2020 Crack between 2.362 and 3.513, Net Profit was 154 M and 171 M , better than recent quarter. Then from then on , Crack continues to rise and Net Profit was Yo Yo up and down , Q2 and Q3 21 even make a loss with crack higher than H2 2020. And now Q1 22 where crack is between 12 to 21, only make net profit of 42 Million nia, with derivative loss of 400+ million, macam HY team don't know how to do hedging. It seems like there is no correlation at all between high crack and net profit of HY.

ha ha, what a wise comments from sslee

@klee, i have no ability to predict HY share price movement next week and determine the effects of bear market or even know if its a bear market

i am purely waiting for Q2 22'results of HY, which i think when released, HY share price can no way be at current level

further i am optimistic till its results are released in Aug, current market refining margin will still be at very compelling level (just too many fundamental argument to support this)

There is only one factor that can change my view on HY:
........................................................

If EU & US stops Russian oil embargo and decides to take in refined oil products from Russia (which i am quite certain such abrupt policy change if at all happens - wont happen before end of Aug 22')

@emsvsi, below is for you:


To those still have difficulty deriving refining margin of refinery linked singapore hub MOPS spot prices, below article shows comparison to historical refining margin.

THIS IS A VERY USEFUL INFORMATION FOR LAYMAN

Q4FY22 mentioned below for Indian refiners is Q1 22 for HY.
These margins are slightly lower as they are for simple refiners.
HY is a complex refinery and derives higher margin.

We can see gross margin of HY for Q1 22' is at 11 USD/brl. 3 USD/brl higher than 8 USD/brl from the table.

For Q2 22', complex refiner like HY will have refining margin at USD 24/brl level.

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

Oil refining margins at new highs of $26

Singapore Gross Refining Margins – Asian benchmark – touched new life highs of the $25.9 per barrel mark, on the back of rising demand for refined products globally.

Updated Jun 17, 2022

https://www.timesnownews.com/business-economy/companies/oil-refining-margins-at-new-highs-of-26-article-92270853

Chart Header:- Singapore GRMs On Uptrend
Q1FY21 -0.9
Q2FY21 0
Q3FY21 1.2
Q4FY21 1.8
Q1FY22 2
Q2FY22 3.7
Q3FY22 6.1
Q4FY22 8.1
Q1FY23 20

Oil refining capacity growth not enough to solve global diesel crisis:IEA

16/06/2022

https://www.argaam.com/en/article/articledetail/id/1568263

A wave of new oil refining capacity that is coming on stream will not be enough to solve a global shortage of diesel, jet fuel and similar petroleum products, according to International Energy Agency (IEA) report published June 15.

Increased processing -- as new plants come online -- this year and next will fall short of what is needed to match demand for the so-called middle distillate fuels, Bloomberg reported, citing the IEA report.

The agency said the future oil refining operations will likely not be sufficient to fully meet the demand for middle distillates in 2022 or 2023.

In the past weeks, prices for middle distillates have soared due to an unprecedented shortage, which has increased petrol costs at the gas station.

Post removed.Why?

Fair statement from OTB

Its our job to show the average crack spread link to the gross profit of hengyuan

to let market see what HY earnings will be say at 13 USD/brl (which easily exceeds EPS of RM 1/qtr, even more so with weakening RM)

once market understands this link clearly, its up to market to decide what price to assign to HY knowing earnings going forward with available crack spread data

statement like crack spread drop will lead to price drop without any tangible figures is very misleading and opportunistic knowing market haven't really figure out HY earnings potential with current margin

To those still have difficulty deriving refining margin of refinery linked singapore hub MOPS spot prices, below article shows comparison to historical refining margin.

THIS IS A VERY USEFUL INFORMATION FOR LAYMAN

Q4FY22 mentioned below for Indian refiners is Q1 22 for HY.
These margins are slightly lower as they are for simple refiners.
HY is a complex refinery and derives higher margin.

We can see gross margin of HY for Q1 22' is at 11 USD/brl. 3 USD/brl higher than 8 USD/brl from the table.

For Q2 22', complex refiner like HY will have refining margin at USD 24/brl level.

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


Oil refining margins at new highs of $26

Singapore Gross Refining Margins – Asian benchmark – touched new life highs of the $25.9 per barrel mark, on the back of rising demand for refined products globally.

Updated Jun 17, 2022

https://www.timesnownews.com/business-economy/companies/oil-refining-margins-at-new-highs-of-26-article-92270853

Chart Header:- Singapore GRMs On Uptrend
Q1FY21 -0.9
Q2FY21 0
Q3FY21 1.2
Q4FY21 1.8
Q1FY22 2
Q2FY22 3.7
Q3FY22 6.1
Q4FY22 8.1
Q1FY23 20

as you can see there are still people around who find it very complex to calculate earnings of hengyuan from crack spread data

its like rocket science for majority

Posted by emsvsi > Jun 18, 2022 4:10 PM | Report Abuse

THIS HENG YUAN REMINDS ME OF GLOVE LOVERS WHO TRIED TO CALCULATE ASP AND MARGINS BUT SHARE PRICE DROPPED BY 90% FROM PEAK TO EVEN LOWER THAN PREPANDEMIC

@information, dont waste time on hng33. He is a selfless guru wants to help other investors for obtaining good karma for his after life..he he

When July kicks in people will panic buy already

I think the sell down is due to Koon panic seeing results of Q1 that he cannot comprehend - at that age you can understand they cannot handle uncertainty well

the same person who boosted the price is the cause of its decline

patience

@BLee, you are correct but OTB is also correct since he had used average refined oil product pricing with an average crack spread of 22 USD/brl

you can see he had obtained USD 130 for refined oil by adding USD 22/brl on Crude oil price of 108 USD/brl

FYI, the asian average refining margin yesterday is USD 31.8/brl considering Diesel & Jet Fuel (kerosene) crack that is sky rocketing...



Posted by BLee > Jun 18, 2022 1:57 PM | Report Abuse

@OTB: Sales volume = 10.6 million barrels
Revenue = 10.6*USD130*RM4.38 =6.036 billion
Purchase =10.6*USD108*RM4.38 = 5.014 billion
Gross profit = 1.021 billion

BLee: Hi Bro @OTB, please consider the following details I have extracted from a Google search result:
Quote
What percentage of crude oil is used for fuel?
About 45 percent of a typical barrel of crude oil is refined into gasoline. An additional 29 percent is refined to diesel fuel. The remaining oil is used to make plastics and other products (see image Products made from a barrel of crude oil, 2016). Unquote

The calculation of input/output to refine into gasoline based on using the same value of 10.6 million barrels is incorrect. Tq

Happy Trading and TradeAtYoutOwnRisk

now i understand why energy stocks in US dipped

this should benefit energy and refinery stocks outside U.S


Posted by 888STOCK888 > Jun 18, 2022 12:01 PM | Report Abuse

www://oilprice.com/Energy/Energy-General/Why-Biden-Should-Avoid-An-O...

When oil and fuel markets are tight globally, the worst thing the world’s top crude oil producer and a major exporter of refined petroleum products could do is to restrict exports. Depriving the market of oil at this time would not only not lower gasoline prices in America—it would send crude oil prices even higher, if $120 a barrel isn’t high enough.

oil price drop will ensure there is no demand destruction

that is why diesel spread shooting up high:


https://www.tradingview.com/symbols/NYMEX-GZ1!/


FYI, the average refining margin is the highest to date hitting USD 32/brl


HY will realize every single profit as per the crack spread just that due its hedging methodology , its PAT reported is delayed by a month

imagine if it did not hedge both refined and crude at the same time, its earnings will be significantly distorted when oil price drop drastically as we are seeing now

you are right Charlest...you are a very useful asset of i3 to think out of the box

sometime i forget stock market is 90% emotion and only 10% maths...

it works both ways on gains & losses


Posted by CharlesT > Jun 16, 2022 5:25 PM | Report Abuse

At 4.80+ now i think more than 90% of the investors here r suffering paper loss , even Probability....though he started to buy below RM5 but very high chance he bought more n more up averaging after working out his calculation/ profit projections last few weeks

you hit the nail

Posted by stockwin > Jun 12, 2022 3:52 PM | Report Abuse

In short Q2 2022 PAT is already in the bag. Meaning explosive. What ever hedging activities in June 2022 will be captured in Q3 2022 result.

great to hear that John..

Posted by Johnzhang > Jun 12, 2022 3:44 PM | Report Abuse

@probability,
It's clear. Thanks

yes, it lags by 1 month

HY will be able to realize Mar, Apr and May for Q2 and their crack spread is very strong (refer chart on the article shown).

Apr, May and June averages about the same


Posted by Johnzhang > Jun 12, 2022 3:27 PM | Report Abuse

Assuming gasoline price go up USD10 per month for next 2 months while crude stay averaging USD120 (ie no change) , your realised crack margin is again negated by USD10 derivative loss for the next 2 month.
So, for 1 qtr sales your realised crack margin averaging (10+20+30)/3 =20
The spot crack margin is (20+30+40) = 30 (without hedging)
The opportunity loss can be substantial when crack spread continue to trend higher.

Thats why we can expect HY Q2 results to be exactly as per market opportunity without hedging as it is for Mar, Apr, May performance, i.e lagging 1 month.

On Q1 22, it was showing the performance of Dec 21', Jan 22', Feb 22' crack spread with the added loss from probably buying a lot of russian oil in Feb 22' (due to its discounted price) and getting rejected by Shell & Malaysian government in Mar 22'.

Exactly John...

My brother hedged at USD10/brl a month back right.
Now the net effect of my cash market transaction margin of USD20/brl and his lost at -10USD/brl had returned us back to the original hedging value of USD10/brl.

Thats why the margin after hedging gain or loss always lag 1 month.

If my brother had made gain on his Futures trading, my cash market margin would have shrunk by the same magnitude bringing our combined effective margin back to USD 10/brl again.


Posted by Johnzhang > Jun 12, 2022 3:00 PM | Report Abuse

while i am forced to deliver in small bundles of 1 million barrels to you, my twin brother actually has the flexibility to enter any size of hedging contract he wants based on his judgement on how attractive the margin is and its sustainability going forward

however, every time i deliver, my brother must close the position on the futures market by the same amount

if he increase the size of the contract too big, then the longer it will take for my cash market transaction to clear his hedging stakes

by looking HY refining margin swap contract of about USD 290 million, we can predict that it takes 1 month sales volume at cash market to clear this hedging

Sample business transaction of HY
................................

Say John you are the Shell retailers in Malaysia

Myself and my twin brother represent HY. I deal with CASH MARKET and my twin brother deals with FUTURES MARKET.

Our sales volumetric achievable in a month is 4.0 million barrels, 1.0 million barrels per week.

1) CASH MARKET transaction done by me;

I deliver refined oil to you exactly every Friday at 1 million barrels.
Every week at the same time Friday, i also buy crude oil from Petronas at the same volume 1.0 million barrels.

You pay me as per current market value of refined oil (spot price matching singapore hub crack spread) and i pay petronas as per the current brent spot price.


2) FUTURES MARKET transaction done by twin brother. You can view this exactly like stock market.


Every time i deliver 1 millon barrel to you, my brother will clear back 1 million barrels from the futures market buy selling back at current futures the 1 millon barrels he had gone LONG 4 weeks ago.

At the same time he will also clear 1 million barrels refined oil by buying back at current market the refined he had gone SHORT 4 weeks ago.


If my twin brother lost money in Futures market that he is forced to do (cover back his long and short positions) due to my cash market transaction in parallel, its derivative loss. If he had made money, then its a derivative gain.

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

You can see from above, when the cash market and futures market operate as per above mechanism, the margin HY will secure is always trailing by 4 weeks time as per hedging they had done on futures market.

@klee, my efforts here obviously is not to predict or effect HY price movement next week. Its for me to be sure that my thesis is correct.

I certainly agree that tomorrow HY price will likely drop considering the market sentiment and the price trend of HY recently.


Posted by klee > Jun 12, 2022 1:45 PM | Report Abuse

Probability is extremely hard working.From my years of experience,i have yet to see any stock that can withstand a major correction on the dow.As the saying goes...when dow sneezes,the rest catch the cold.I wish you well.

On point no.3. i agree i have not investigated on the other derivative option they have.

The only consolation on this uncertainty is that if the two variables (1) crude oil & (2) refined oil price stabilizes between Q 1 and Q2 and going forward, the derivative impact will be minimal too (positive or negative).

derivative loss / gain cannot simply be recurring if the price of the above two variables are unchanging

derivative can only thrive on changes


Posted by Johnzhang > Jun 12, 2022 12:56 PM

I only have the following to highlight (again , a laymen perspective ) :
1. Your case study is base on 100% sales hedged 1 month forward on rolling basis . I like to think that management would hedged 2 or 3 months forward as management should be more concern of uncertainty in longer future.
2. You did not consider the discount in forward contract for crude and refined. a USD2-3/bbl discount for 1 month forward is very common.
3. You only look at the refining margin swaps in your case study. There are 3 other type of commodity hedges, namely Forward priced Commodity Contracts, Commodity Swap Contracts and Commodity options contract with considerable notional sum . I appear to me that these 3 other commodity hedges are independent of the refining margin swap and may have some impact to bottomlines.

On point 1 & 2, frankly i do not know the meaning and implication of hedging 1 or 2 month forward. If at current market the hedging pricing are attractive, why would one want to hedge say 2 months forward.


Perhaps there is interest charges for holding longer period.
Perhaps they can only close their hedging after the forward months they hedged ended.
Perhaps its based on certainty when they can match the same transaction in cash market clearing current obligation of sales & purchase to existing supplier & customers.

You may clarify on this.

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

In my basis, i simply assume that they can hedge as per current month spot rate which is attractive & effect the cash market transaction the following month as they have a steady customer and supplier base. i.e only 1 month lead time.

Further, they can be hedging weekly in smaller bundles of say 1/4 of the 3.5 million barrels ( say 0.9 million barrels) with expected closing in 4 weeks time parallel to the cash market transactions.

As such at any point in time, you can see the total refining margin swap contract value is 4 weeks value, i.e 3.5 million barrels as reported every quarter (referring to their refining margin swap contract value).

Every time, a batch of 0.9 million barrels expires, a new batch of 0.9 million barrel contract is entered. Thus, at any point in time its 4 batches of 3.5 million barrels contract still active.

@Johnzhang, happy to hear your comments..

I am 100% inline with your conclusion below:

In the nutshell, the purpose of hedging are 2 folds :
(a) to protect inventory losses from the effect of price falling before the sales materialized
For this, the hedging gain/loss will be offset by the higher/lower cost of sales.
(b) to lock in (protect) reasonably good margin of future months sales.
For this, company may suffer opportunity losses when crack spread trend higher and additional profit when crack spread trend down.

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.

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.

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

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-HENGYUAN_derivatives_loss_on_Q1_22_completely_clarification.jsp

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.

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

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-HENGYUAN_derivatives_loss_on_Q1_22_completely_clarification.jsp

From the size of it 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.

If you hedge at the futures say 10.5 m barrels volume, it will take one quarter for this hedged margin to changed to a new figure

as it take one quarter to sell the same volume at cash market ( margin lag period 1 qtr)

if you hedge only 1 million barrels then it takes only 1 week of cash market to clear this sales volume at the margin you capture (hedge) (margin lag period 1 week)

Hi John, not sure on your query and what you are trying to obtain

inventory you see on BS carry little meaning

when you buy crude, you do the sales of refined oil at the same time at the same quantity (either by physical contract or hedging)

If you want to see the effects of changing the lead time, your transaction volume has to be changed as per below formula

the lag period is determined by hedging volume divided refining throughput (3.5 m barrels / month)

i can share the excel file and you can play with volumetric sales throughput and adjust the lag accordingly

example, if you set for 1.5 months lead time, your sales volume will be 3.5m barrels per month x 1.5 = 5.25

in a qtr you will only experience the hedging loss or gain taking place twice then



Posted by Johnzhang > Jun 11, 2022 6:00 PM | Report Abuse

@probability,
Average inventory holding in 2021 and 2022 were 1.72 months and 1.86 months of sales vol. (figures derived from year end BS , inventory value/ avg purchase per month).
Taking into consideration of 1+ months of lead time between contracts and crude arrival, the gap between contracting crude and eventually selling refined products will be 3 months. Hedging is therefore particularly important to cover the risk of price going opposite direction during the 3 months.
Can you simulate another example under scenario described by me in above.

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

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-HENGYUAN_derivatives_loss_on_Q1_22_completely_clarification.jsp

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

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-HENGYUAN_derivatives_loss_on_Q1_22_completely_clarification.jsp

take your time, we are all learning - the more we brainstorm the more certain we would be on future of HY

Posted by Johnzhang > Jun 11, 2022 5:28 PM | Report Abuse

@probability,
I am absolutely a layman in derivatives. Will come back to you with my layman’s opinion tomorrow. Thanks
————————

not sure i got your query..

when you LONG the crude & SHORT the refined oil, you are protecting yourself against margin (i.e the crack spread) contraction

(1) if price of crude rise & refined oil drop when you want to close your position at the futures (take it as stock market), you will make money at the futures

(2) while at the cash market ( the real sales & purchase market), you will lose money due to shrinking margin by the same amount compared to the margin the time of hedging

gains in (1) will neutralize loss in (2), ie your margin at the time of hedging is retained


If on the other hand, margin or crack had expanded

(1) will lose money'
(2) will gain money by the same amount

again (2) will neutralize (1)

hedging basically cause your refining margin to lag by a certain period, often a month (the [lag period is derived by hedging volume divided refining throughput) while ensuring every month you make profit as per market opportunity





Posted by Raymond Tiruchelvam > Jun 11, 2022 5:14 PM | Report Abuse

probability.... thanks for the crack spread future's hedging vs un hedge position.... gives me a good understanding, but iscracknposition itself? there a futures market cor

anyone who wish to invest or divest from HY, it would be mandatory you understand the following & why refinery do this before you do so

TQ


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.

@Johnzhang, would love to know your comments on this article:

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-HENGYUAN_derivatives_loss_on_Q1_22_completely_clarification.jsp

guys why so obsessed about OTB or KYY and simply accuse HY management conman etc...

have you all spend sometime going through their annual report and the rich & vast information they shared about their business, accounting methodology and hedging principles?

do you all think these are fake information?

there are so many malaysian executives involved in their top management

the whole world knows refineries are minting money

OTB and KYY are not going to dictate what Q2 earnings is going to be and you should know that is all that matters (Q2 earnings) to determine HY price direction in near future

so, please spend some time understanding HY hedging strategy and business model to predict yourself what will be the earnings going forward

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

For everyone's reading pleasure during the weekend:

HENGYUAN derivatives loss on Q1 22' complete clarification

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-HENGYUAN_derivatives_loss_on_Q1_22_completely_clarification.jsp

For everyone's reading pleasure during the weekend:

HENGYUAN derivatives loss on Q1 22' complete clarification

https://klse1.i3investor.com/blogs/2017/2022-06-11-story-h1624320379-HENGYUAN_derivatives_loss_on_Q1_22_completely_clarification.jsp

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.


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.

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

do correct me if i am wrong

https://economictimes.indiatimes.com/industry/energy/oil-gas/ril-margins-at-a-20-year-high-as-asian-benchmark-grms-hit-a-record/articleshow/92045903.cms?from=mdr

"Globally, we expect a shortage of one refinery annually for the next few years. If we were to include arbitrage crude advantages, which RIL highlighted earlier, margins would be even higher, and 50% above their last peak seen in mid-2008," said Morgan Stanley Research in a June 6 report.

According to analysts, the global oil and finished products that were already stretched due to the pandemic and later the Russian invasion of Ukraine, could see further tightening once Chinese demand normalises as China unlocks from the pandemic induced lockdown.

we have not observed such phenomena in other refinery as none of them:

1) buys russian oil and,'
2) sell 90% of their refined oil to Shell (who decided in Mar 22' abruptly that they will stop buying russian oil)
3) do not have their own retails kiosks to avoid hedging

Post removed.Why?

In Q1 22', HY has reported quite a significant derivative loss and in my opinion it is likely explained by the following:

As i had mentioned earlier, as a pure refinery now (unlike during Shell’s time where they owned retail kiosks), it would be mandatory to hedge the crude (LONG) and hedge the refined oil (SHORT) at the same time and same quantity 100% - all the time every month as typically done by pure refiners.

Since 14% of their crude at the end of Q4 2021 (about 1.57 billion) is of Russian crude. When the valuation of this oil is made as per market value at the end of Q1 22' when it is no longer tradable, it will have zero value, i.e it will result with pure hedging loss.

While for the balance oil it would have resulted as hedging gain as the crude oil price was moving up.


Let us do the math:


PART 1
…….


Russian oil: 14% x 1.57 billion inventory (end of Q4 21’)
= 210 million
Final valuation is zero, thus hedging loss: - 210 million (likely occurred in Mar)



PART 2
…….

Crude oil hedging:

The Brent price approximately changed from $ 77/brl (in Dec 21’) to $ 108/brl (in Mar 22’).

Hedging gain: 3.5 million barrels (monthly hedging) x (108 – 77) x 4.25 exchange to MYR
= 461 million


Refined oil hedging:

The Refined oil price approximately changed from $ 83/brl (in Dec 21’) to $ 127/brl (in Mar 22’).

Hedging loss: 3.5 million barrels (monthly hedging) x (83 - 127) x 4.25 exchange to MYR
= -654 million


Net hedging loss from refining margin swap: -654 + 461
= - 193 million


PART 3
……….

NOTE: this above is excluding the inventory write down of 131 million that they had paid but unable to utilize.

PART 1 + PART 2 + PART 3 explains all that what we are seeing for Q1 22’ PAT.

For Q2 22’ expect PART 1 & PART 3 to no longer be there while the net hedging loss in Q2 can be zero (as the gain in crude oil price between end of Mar and end of June appears to be matching the gain in refined oil during the same period). The hedging gain and loss will cancel each other.

Hi John, it does not fall into 'stockholding' loss

this appears likely to be related to russian oil that was paid but unable to utilize

you can see historically under the category you mentioned (8 qtrs for 2020 & 2021) it does not have any big positive values (gain)

no way 8 qtrs it does not show big stockholding gains . In Q4 21' the performance review did mention stockholding gains contributed to their good profit (they are definitely not talking about 1 million gain here)



Posted by Johnzhang > Jun 9, 2022 9:50 PM | Report Abuse

Hi Probability,
Are you sure ? As far as I know, the figures in the note of account for inventories write down or gain entails all event including inventory mark to market .
How do you explain the RM132 mil inventory write down in Q1 2022 ? For off spec too ?
-------------------------
FYI John
realized where u took this numbers
these are inventory write down (similar to offspec) not stockholding gain/loss..

In stock market we may see opposite scenario, where say by 'unbelievable event' that the crack spread dropped below 7 USD/brl by Aug 22...market will still push HY to above RM 17 looking at the EPS above RM 2 for Q2..

short term price movement we have no control, but HY destiny is kinda confirmed by end Aug 22

go for a world tour next 2 months and come back...lol!