Falling crude to dent oil marketers’ margins

While cracks are quoted at Platts Singapore assessed prices, Singapore being the most active market for the Asian region, crude oil is marked to Dubai as India imports most of its requirements from the Arabian Gulf to avail of the freight advantage.

Usually, it takes upwards of 35 to 40 days to process the crude into saleable distillates from the time it is loaded onto a tanker. So, if a refiner has contracted oil at, say, $95.9 a barrel in September when the gasoil spread was at $23.03, it is ready to sell the gasoil in November. However, by November if the gasoil crack has fallen to $69.58 from $118.93 in September, the crack spread has turned a negative $26 ($69.58-$95.90) and the refiner loses heavily.


If, however, the refiner locked in the paper crack spread at $23.03 in September itself, it would get the same amount despite the spread having come down to $19.12 in November on the OTC market. The paper profit works out to $3.9 a barrel which would reduce the refiner’s loss on the gasoil crack spread to around $22 against $26 if it had remained unhedged.

“In November 2007, the jet crack spread soared to a record-high of $26 a barrel. We never though that the spread could exceed that level and sold whenever prices trended there. However, by May 2008 the crack spread shot up to an unexpected $40.08.

Crack spreads in the year to date have been extremely volatile,” said SV Narasimhan, director (finance), IOC. While PSU oil refiners’ boards approve hedging up to 10% of physical exposure, private refiners could hedge up to 40-50% of their portfolio.

“Hedging is more like purchasing insurance against the risk of prices falling and thus protecting margins. Having said that, if there is a hedging gain, it definitely helps stabilising the revenue stream of a company,” said SK Joshi, director, finance, BPCL