Posted by probability > 2022-06-11 14:37 | Report Abuse

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.

Posted by probability > 2022-06-11 14:52 | Report Abuse

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

Posted by probability > 2022-06-11 17:49 | Report Abuse

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

Posted by probability > 2022-06-11 20:40 | Report Abuse

@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.

Posted by probability > 2022-06-11 20:48 | Report Abuse

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.

Posted by botakpang2 > 2022-06-11 21:53 | Report Abuse

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

Posted by vinc3362 > 2022-06-12 16:21 | Report Abuse

Well done. Thank you.

Posted by williamtkb > 2022-06-12 18:19 | Report Abuse

So... Monday Limit down???

Posted by kebling98 > 2022-08-27 10:55 | Report Abuse

Petron M recorded 373m hedging loss
Still expect 100m loss for hengyuan?