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Adequately addressing basis risk in the commodity pricing cycle - EY - India

Cash flow stability for oil refining and marketing companies

Adequately addressing basis risk in the commodity pricing cycle

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Pricing of crude is typically undertaken at the point of shipment whereas pricing of products for domestic sales is based on a defined averaging period of either 15 days or 1 month.

Different benchmarks used for pricing of crude and hedging crack margins further enhance oil price risk.

Pricing of products for exports is undertaken based on pricing prevailing at the point of shipment.

The pricing cycle and averaging period for crude and products leads to difference in timing of pricing in and pricing out of products and crude. Moreover, different benchmarks used for pricing of crude and hedging crack margins further enhance oil price risk.

While oil price risk management programs have focused on locking in cracks at seemingly attractive levels, the aspects that require more process-oriented and mechanized attention include:

  • Trans-shipment time of crude leading to mismatch in pricing-in and pricing-out
  • Averaging periods from pricing of crude and products for different parcels
  • Benchmarks for pricing of crude and those used to hedge cracks

Putting in place strong risk management processes to track underlying exposures on a transaction basis will help manage basis risk in the commodity price cycle.

*Refer to the attached PDF for source information

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