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BQEdge | Record OI Build-Up For HUL And GAIL’s Growing Liability

BQEdge is specially curated for BQBlue subscribers. Every day this note will offer special equity market and stock-specific insights and flag select emerging trends in the tricky-to-trade derivatives market.

On Today’s Edition:

  • What does the record-high open interest build-up in Hindustan Unilever Ltd’s stock suggests?
  • Is GAIL (India) Ltd’s asset turning into a liability?

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Is GAIL’s Asset Turning Into A Liability?

The divergent trend seen in prices of liquefied natural gas, in Asia and the U.S., will significantly impact GAIL (India) Ltd.’s gas trading business. Singapore gas prices, the benchmark for Asia, have been falling for atleast four months, while the prices of gas in the U.S. have been holding up. More recently U.S. LNG prices have spiked due to cooler than expected winter, while in Asia prices are down due to a ramp-up of Japanese nuclear power supply, falling crude prices and adequate storage preparation in China for the winter.

Now here’s why its making life tough for GAIL. The company buys LNG at contracted prices from the U.S. and sells at prevailing market prices in Asia. The gas trading business generates around 70 percent of GAIL’s revenue.

FYI - For GAIL, the contracted price is 115 percent of Henry Hub prices plus $3 per mmBtu (million British thermal unit) of fixed fees and transportation charges, which range between $1.5-2 per mmBtu.

The nation’s largest gas distributor reported a 47 percent rise in its operating profit – highest in the last 13 quarters - aided by the gas trading segment. However, if this divergence in prices continues, this business segment, which so far has been an asset for GAIL, could well turn into a liability.