(March 17): Asian oil refiners are staring down deep losses after the Middle East war caused the benchmark Dubai price to soar, upending their hedging positions, according to traders.
The loss of Persian Gulf supply has spurred sharp rallies in the region’s oil grades that feed into the Dubai benchmark, which derivatives are priced off. Refiners typically take short positions — wagers that profit if prices fall — on related derivatives in the months prior to buying crude, as part of typical feedstock cost management, said the traders, asking not to be named as they’re not authorised to speak to the media.
Hedging structures “work as long as crude cargoes arrive, runs are maintained, product availability is certain, and is sold into the market”, said Sumit Ritolia, lead research analyst for refining and modelling at analytics firm Kpler Ltd. “However, the current disruption is breaking that linkage. A strategy designed to reduce risk is turning into a source of financial pressure.”
Chinese and Japanese refiners are likely among those worst hit, given their heavy reliance on Middle Eastern crude supply, now in jeopardy as the war rages on. Some processors could be facing losses in the hundreds of millions of dollars, the traders said.
Many Middle East oil cargoes have been effectively lost, given the near-total halt on oil tanker traffic through the Strait of Hormuz since the war started at the end of February.
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There’s been an unprecedented surge in the three-month spread for over-the-counter Dubai swaps contracts. They’re now around US$55 ($70.29) a barrel in a bullish backwardation pattern, more than three times higher than the previous peak in 2022, according to General Index data. The gauge was around US$1 in backwardation before the war, and was in the opposite contango structure as recently as January.
The refiners likely placed their hedges based on levels in January and February, the traders said.
“With delayed or non-materialising crude cargoes, refiners are left holding short-paper positions without the corresponding physical barrels,” Ritolia said. “This creates a mismatch where hedges remain active, but the underlying exposure they were meant to offset is absent.”
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Part of the reason for the elevated Dubai benchmark price was the removal of some Middle Eastern crudes, which need to transit the Strait of Hormuz. That’s prevented a portion of the supply from the Persian Gulf from being used to price the regional benchmark in a trading window run by S&P Global Energy. That has made the benchmark more vulnerable to outsized moves caused by any single player, the traders said.
“Platts Dubai continues to reflect the value of Middle Eastern sour crude trading in the spot market, informed by robust activity in the Platts Market on Close assessment process,” S&P Global Energy said in a statement. “While the underlying deliverable crude grades have evolved in line with market conditions in recent weeks, Platts has adapted the benchmark and continues to actively engage with market participants on its Dubai crude methodology.”
Even if the war was to end quickly, and Hormuz was to reopen, it would still take the physical crude supply chain about six to eight weeks to get back to normal, according to Kpler’s Ritolia. “Meaningful supply adjustments would likely only appear from late April or May onwards.”
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