China Aviation Oil

Anybody know how does the drop in oil price affect CAO? I looked at the sensitivity analysis in the 2013 AR and find it confusing. It showed that a 10% drop in oil price will result in a $1.48M gain in "physical and paper derivative instruments", but also stated:

"The Group considers holding oil inventory as part of their overall trading strategy. An increase of 10% in the fair value of oil inventory would have increased profit or loss by US$11,020,000 (2012: US$1,557,000). A 10% weakening of the fair value of oil inventory would have an equal but opposite effect on oil inventory."

What does the above statement mean? Is there a typo somewhere?

(06-12-2014, 03:15 PM)touzi Wrote: Anybody know how does the drop in oil price affect CAO? I looked at the sensitivity analysis in the 2013 AR and find it confusing. It showed that a 10% drop in oil price will result in a $1.48M gain in "physical and paper derivative instruments", but also stated:

"The Group considers holding oil inventory as part of their overall trading strategy. An increase of 10% in the fair value of oil inventory would have increased profit or loss by US$11,020,000 (2012: US$1,557,000). A 10% weakening of the fair value of oil inventory would have an equal but opposite effect on oil inventory."

What does the above statement mean? Is there a typo somewhere?

Profit or loss is the official full name of income statement (P&L actually stands for profit or loss , rather than profit and loss). so i suppose they mean that 10% increase in oil inventory will have a positive impact on net income? and vice versa?

(06-12-2014, 03:15 PM)touzi Wrote: Anybody know how does the drop in oil price affect CAO? I looked at the sensitivity analysis in the 2013 AR and find it confusing. It showed that a 10% drop in oil price will result in a $1.48M gain in "physical and paper derivative instruments", but also stated:

"The Group considers holding oil inventory as part of their overall trading strategy. An increase of 10% in the fair value of oil inventory would have increased profit or loss by US$11,020,000 (2012: US$1,557,000). A 10% weakening of the fair value of oil inventory would have an equal but opposite effect on oil inventory."

What does the above statement mean? Is there a typo somewhere?

I didn't read the AR, but I guess it refers to different things. One reference is "physical and paper derivative instruments", the other is "inventory".

"physical and paper derivative instruments" includes inventory and hedging derivatives, I guess.

(not vested)

(06-12-2014, 04:52 PM)kikababoo Wrote: Profit or loss is the official full name of income statement (P&L actually stands for profit or loss , rather than profit and loss). so i suppose they mean that 10% increase in oil inventory will have a positive impact on net income? and vice versa?

OIC. I learned something here. Thanks !

(06-12-2014, 09:36 PM)CityFarmer Wrote: I didn't read the AR, but I guess it refers to different things. One reference is "physical and paper derivative instruments", the other is "inventory".

"physical and paper derivative instruments" includes inventory and hedging derivatives, I guess.

(not vested)

Thanks, that is interesting. Despite a lost in inventory due to drop in oil price, taken together with hedging there is still a gain in P&L.

(06-12-2014, 11:24 PM)touzi Wrote:

(06-12-2014, 09:36 PM)CityFarmer Wrote: I didn't read the AR, but I guess it refers to different things. One reference is "physical and paper derivative instruments", the other is "inventory".

"physical and paper derivative instruments" includes inventory and hedging derivatives, I guess.

(not vested)

Thanks, that is interesting. Despite a lost in inventory due to drop in oil price, taken together with hedging there is still a gain in P&L.

The derivatives are used to hedge the impact of oil price. The end result should be more and less balance upon net-net, either drop or rise of oil price, otherwise it will be a highly risky speculative bet.

CAO has learned from the previous mistake of derivative loss, which almost kill the company.

http://www.risk.net/energy-risk/news/151...le-survive

The recent falling oil prices hurting CAO which have various hedged positions through derivatives.

http://infopub.sgx.com/FileOpen/CAO_Resu...eID=323243

(06-01-2015, 11:55 AM)butcher Wrote: The recent falling oil prices hurting CAO which have various hedged positions through derivatives.

http://infopub.sgx.com/FileOpen/CAO_Resu...eID=323243

I saw no evidence of CAO hurt by its hedging?

The 3Q losses is due to the following, in the report.

"The Group incurred a loss of US$2.84 million in gross profit for 3Q 2014 compared to a profit of US$7.12 million
for 3Q 2013, mainly attributable to losses incurred in trading of other oil products as demand for fuel oil remained
depressed and the market for petrochemical products was highly volatile and lower optimisation gain from trading
of jet fuel."

I think included in the revenue are trading gains or losses from derivatives trades made.


Concluded after reading its annual report, please correct me if I am wrong.

http://media.corporate-ir.net/media_file...t_2013.pdf

Read on Note 3.5 - Significant accounting policies

Derivative financial instruments
The Group holds oil commodity derivatives that are recognised initially at fair value; any attributable transaction costs are
recognised in profit or loss as incurred. These derivative financial instruments are not designated in a hedge relationship.
All changes in fair value, subsequent to initial recognition, are recognised immediately in profit or loss.


Read on Note 3.10

Trading of oil commodity derivatives
Gains or losses on oil commodity derivatives which are classified as held for trading purposes are recognised in profit or
loss on a net basis.


Note 18 Revenue:-

'Included in revenue is net loss of US$14,561,000 (2012: net loss of US$21,036,000) recognised in relation to derivative
financial instruments.'



In general, most commodities trading companies I come across engaged in some form of derivatives trades. Think their gains or losses are recognised to profit or loss immediately in the relevant period.

I refer to the same AR. The derivatives are for risk management, rather on any speculation.

Page 139:
"The Group buys and sells derivatives in order to manage market risk. All such transactions are carried out within the
guidelines set by the Risk Management Committee."

Page 140:
"The Group’s policy is to manage its costs of purchase and sales of jet fuel using commodity paper derivative instruments.
The Group enters into commodity paper derivative instruments, in which it agrees to exchange the difference between
the fixed and floating oil prices, calculated by reference to an agreed-upon principal quantity, with its counterparties. The
commodity paper derivative instruments commit the Group to buy or sell commodities at a pre-determined price with
settlement dates that range from one month to three months."