Oil Refinery Stocks Suffered Unexpected Losses, Futures Hedging Should Not Be Too Fierce.

"Unexpectedly, Saudi Arabia suddenly started a crude oil price war, and we were caught unprepared." A finance director of a domestic private refinery told the reporter.

In the past two trading days, the WTI crude oil futures price dropped about 30%. In March 9th, the first thing he went to work was to finalize new futures hedging with executives.

"The original futures hedging strategy is certainly out of date. At that time, we thought that OPEC+ would reach a production reduction agreement to keep oil prices at 50-60 US dollars / barrel. Now Goldman Sachs and other investment banks predict Saudi Arabia's oil price war will bring oil prices to near us $20 / barrel." He told reporters. At present, they increase the spot value of domestic crude oil futures by raising 25 percentage points on the one hand, while the official selling price of crude oil sold to Asia is larger than that of DME Oman crude oil futures to more than -3.1 U.S. dollars / barrel. Through short selling of Oman crude oil futures, Singapore's crude oil futures will buy up Singapore crude oil futures to carry out cross land arbitrage trading, locking the price difference of future imported crude oil purchase. Cost.

Reporters have learned that the sharp drop in global oil prices caused refinery enterprises to reduce the risk of inventory impairment, while facing the new business challenges of lower prices of chemical products and shrinking crude oil processing profits.

"Since March 9th, PTA, bitumen, methanol, ethylene glycol and other downstream products futures are all down, and we are almost selling a ton of deficit." A business director of a private refinery in Zhejiang admitted to reporters that what worries them most is that banks have tightened their credit due to a sharp drop in crude oil processing profits.

Reporters learned that in March 9th, many refineries increased their short positions in futures, such as PTA, asphalt, methanol and so on. On the one hand, they were locking in processing profits, and on the other hand, they were expanding the market through futures market.

"But we seem to be a bit overweight." The business director told reporters that as the top executives expected the price of oil and related chemical products to continue to fall, they bet on the short positions in the futures market where the price of methanol fell, reaching 1.8 times their output in the next 3 months. Once the price of methanol rebounded, the enterprises' overhedging measures will be faced with risks such as additional margin and performance delivery.

"The current part of the oil refining enterprises' hedging strategy still has certain speculative elements." A Futures Company analyst told reporters in the field of crude oil. For example, they simply use futures profit and loss as the basis of hedging assessment, hedging positions substantially exceed the actual risk exposure of enterprises, and under the wrong concept of "hedging can hedge all risks", frequent short term operations are profitable. Therefore, on March 9th, they also continued to rectify the improper hedging measures of some refineries and reduce their unnecessary futures exposure as far as possible.

Multi Strategy hedging

Faced with a sharp drop in oil prices, the first reaction of many private refineries is to "store oil at low prices".

"In the morning of March 9th, we contacted the overseas suppliers of crude oil, and when we learned how much needed for the performance of Saudi Arabia, we planned to purchase raw material demand in the next 6 months at a stretch." A large domestic private refinery vice president told reporters. After all, global oil prices have never dropped to near us $30 per barrel over the past 3 years.

However, cheap oil seems simple, but it is not easy to operate.

Due to the global spread of the new crown pneumonia epidemic, the efficiency of imported crude oil transportation has declined, and the crude oil purchased by enterprises at low prices may not be able to deliver quickly. The increase in the corresponding storage and transportation costs has also pushed up the actual procurement cost of imported crude oil.

"On March 9th, we also tried to lock in a batch of imported crude oil raw materials (i.e. crude oil was in transit) by point pricing, but sellers are not willing to sell them at low prices." The above vice president of domestic large private refinery told reporters. Today, the purchasing cost of heavy oil in the Middle East is much higher than the current price of at least 7-8 US dollars per barrel.

So his company once intended to lock in the procurement cost in the crude oil futures market, but because the current domestic crude oil futures fell less than the offshore crude oil futures (there was no limit or limit on overseas), they could only wait for the two price differentials to narrow before they built their positions.

Reporters noted that, compared to "low price hoarding oil", many private refineries are more worried about the sudden increase in the risk of crude oil inventory impairment.

"Due to the worry that the crude oil transportation is tight due to the epidemic, we have procured crude oil inventories equivalent to 4 months' output. Now that part of the stock has been reduced by over 10 million yuan at a time, business pressure has suddenly increased." The head of a private oil refining enterprise in the eastern region told reporters. After the global oil price plunged 10% in March 6th, their enterprises have held an emergency meeting to decide on two hedging measures. One is to buy a corresponding number of short positions in the futures market for hedging in the futures market, and the two is to lock down the cost difference of future crude oil purchase through cross land arbitrage transactions.

"If we do not carry out futures hedging, our inventory impairment loss will be more than 10%, which may reach more than 20%." He told reporters that in March 9th, bank telephones had been made to know whether the enterprises had made futures hedging against the fall in oil prices as an important basis for them to tighten their credit policies.

A number of Futures Company energy analysts told reporters that demand for crude oil hedging operation in March 9th was particularly high. Many enterprises had only 60% spot positions for futures hedging, but now that the oil price fluctuates sharply, this proportion has increased to 80%. Therefore, Futures Company and exchanges are required to raise their coverage again.

Speculative impulse still needs to be circumvent.

It is worth noting that refinery enterprises have increased the strength of futures sets, while speculative operations are quietly following.

The former chief financial officer of private oil refining enterprises told reporters that as the management level predicted that global oil prices might fall to 20 US dollars / barrel in the short term, the crude oil futures they established could sell short positions to about 1.5 times that of spot stocks.

"In the meantime, our insurance department also raised objections that the move posed new risks to enterprises. For example, if the oil price suddenly rebounded sharply, the enterprises would be faced with additional margin or performance deliveries, and financial pressure would increase sharply." He said.

In addition, some private-owned refiners see the rising probability of falling oil prices, requiring the hedging department to earn more than 15% short-term returns through futures hedging operations, thereby reducing the pressure on bank loan interest and staff compensation expenses.

In the meantime, we put forward that futures hedging strategy should put the profits and losses of spot and futures together to consider the gains and losses of hedging strategies comprehensively, but the top executives of enterprises still look at the profit and loss of futures market hedging, and even think that the profit from short selling is extremely simple in the case of unilateral oil price drop. The eastern part of the private oil refinery business insurance department heads admitted.

A number of Futures Company energy analysts said that in March 9th, they persuaded many refiners to correct speculative hedging measures, and to help them adjust their hedging strategies. The price difference between domestic crude oil futures and Oman crude oil futures will be used to lock in future crude oil import price differentials, instead of using high capital leverage to bet on widened spreads between the two places to win speculative returns. On the other hand, we will liquidate some crude oil futures, so that the short positions of crude oil futures will basically match with the crude oil stocks of enterprises.

"Because of the high leverage of futures trading, speculative trading often has potential high risks." A Futures Company crude oil market researcher said that due to the global oil price slump of about 30% in the past two trading days, many customers who held long positions in crude oil futures suffered huge losses in early March 9th. Behind this is their excessive bet that OPEC+ will reach a new production reduction agreement to reverse the price of oil. However, Saudi Arabia has launched a crude oil price war so that these customers will encounter Waterloo.

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