Oil refineries increase use of hedging as crude prices cut into profits

Oil refineries around the world have been pressed hard by the recent rise in crude oil prices, drastically reducing profit margins. In response, Risk magazine reports that a growing number of oil refining plant operators have adopted more sophisticated risk management processes.

Traditionally, oil refineries have relied largely on swaps to control their exposure to changing prices, attempting to maintain a steady operating margin. Instead, some refineries have begun to turn to options contracts to take better advantage of higher commodity prices to bring in greater revenue.

In general, oil refineries have increased their use of hedging, particularly with recent developments in Europe where low profits have forced the closure of one of the continent's largest refining plants.

In addition, banks have developed new strategies to help refineries better manage their risk by taking the responsibility on themselves. The banks agree to provide all the crude oil necessary to maintain operations at the plant, while purchasing all of the refined product, thus removing the need to take part in the commodities market.

Risk notes that, while U.S. banks have been on the forefront of these new products, some American oil refineries have been under less pressure to increase hedging, because of lower crude prices in the region.

More information on oil derivatives can be found at PennEnergy's Research area.


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