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With product transport the price risks are very similar to crude transport such as uncertain actual quantities, B/L dates, and a possibility to cancelling the trade, which again require adjusting hedges to match the actual exposure.

Interesting was also, that as told by the risk analyst, it’s is characteristic for oil supply chain that products aren’t always delivered straight to a customer but are delivered first to a storage that is located closer to potential end customers. Also it was stated that from price risk point of view Neste Oil carries the risk until the product is finally sold even though the product is delivered out of original storage. In addition the risk analyst responsible for commodity hedging, having oil storages in different countries and continents creates challenges to get the hedges done correctly. This character in a supply chain creates a risk to under or over hedging. Therefore, as it was underlined by the interviewee, tracking the exposure in different locations requires again close communication between departments as it can’t be considered that a delivery from refinery automatically means reduced price risk exposure as the exposure is carried by Neste Oil until the final sale. It was also told by the risk analyst that in addition to putting product to storage, sometimes products are also loaded from one ship to another during product delivery which again makes it demanding to track the transfer of risk exposure.

In interviews it was also brought up that oil supply chain and oil trade are relatively dynamic and new kinds of pricing models are created every now and then. Further it was mentioned by the risk analyst that when negotiating about new pricing models should this also be communicated to treasury department so that possible new hedging strategies can be developed to match the risk exposure. Furthermore, if new foreign inventories are other changes to supply chain are taken into use should treasury department be carefully informed so that the hedgers are able to follow and identify the exposures. And due to the global nature of oil industry and volatile markets which might create new arbitrages making changes to product flow isn’t peculiar. Once again close communication was highlighted to be essential between operational management, traders, and treasury department.

In oil supply chain there are huge variety of possibilities that might affect to the delivery of a cargo and thus cause unexpected changes; for instance cargo can’t load to a bad weather or draft restriction, the counterparty is proven to be unable to pay for the cargo, or product quality is contaminated. Furthermore it’s common that the changes are unexpected, sudden, practically impossible to predict, and require quick alternative evaluation and final decision making. Therefore it was explained by an interviewee that unexpected events in oil delivery might lead that the hedging was done incorrectly and the risk exposure is unwillingly increased. Further it was noted that if prices have developed to adverse direction there might be a massive impact to sale’s overall profitability. Due to great possible financial impacts of incorrect hedging, in fast paced decision making it’s important that treasury department is kept well up to date. As one of the interviewee mentioned in these kinds of situations close communication is highly important and relying solely on IT-systems would be impossible.

All in all it was highlighted in interviews that there are plenty of variations in oil supply chain especially in product sale and transport parts which create challenges to hedging. However, it was also noted by an interviewee that as individual delivery quantities are usually smaller on selling side than on purchase side, is the impact of one cargo to Neste Oil’s risk exposure smaller on the sale side.

From operational management and traders points of view hedging has a similar role as in crude oil and feedstock transport which was discussed in chapter 6.2. The hedging has mainly affect when something goes wrong with the delivery and hedging alterations create profits or losses. As discussed in chapter 6.2 there has been even court cases regarding the hedges profit and losses in cases that cargo was cancelled.

Figure 26: Connection of supply chain decision making to hedging product transport

According to the interviews, like it is with crude oil and feedstock purchases also most of the product sales are done in U.S. dollars. Further, it was explained that as big share of production is sold to Finland has Neste Oil also a significant portion of sale incomes in Euros as well. From transaction risk point of view product sale has a similar but a reverse impact compared to crude oil or feedstock purchase. Thus a sale in U.S. dollars decreases Neste Oil’s transaction exposure.

Also on sales side the payment is received (and thus transaction risk is reduced) only after the loading when the actual exact volume and the B/L date are known. In addition also on product sale side there is a wide range of different kinds of payment terms. Actually on sale side there’re even wider range of payments terms and different kinds of contacts as there are more modes of transport is use. However tracking the exposures and payments is relatively straightforward due to IT-systems. However, a big share of product sales are done on spot basis, which again requires that treasury gets well informed about the payment terms. Also currency hedges are usually sold after the product has left Neste Oil’s inventories and depending on contract terms it might already be discharged to customer’s tanks.

Also it was mentioned in interviews that transaction hedging is done as net basis which means that equal value of U.S. dollar purchases and sales keeps the transaction risk unchanged. Further, according to the interviewed assistant manager, when buying or selling currency hedges only the total change is taken into account. However, it was also noted by

the interviewee that in order Neste Oil to make profit should the sale incomes be bigger than the purchase expenses. Also it was mentioned that more sales are done in Euros than purchases as Finland is the big market for Neste Oil and basically no feedstock is bought in euros. Also an interesting point mentioned in an interview was that as the business is global and thus there’s a global bank network involved in transferring money which leads to a risk that some receivable payments arrive late due to banks locating in different time zones. Late payments was said again to affect to the net calculations and can thus lead over/under hedging situation. However, it was mentioned that this is only a seldom occasion and thus doesn’t cause massive risk.

Figure 27: Connection of currency hedging to product transport