Huge oil trading loss sinks energy trader SemGroup

Reuters ^ | Jul 22, 2008 | Robert Campbell

[decimon]

NEW YORK (Reuters) - A massive $3.2 billion trading loss on oil futures and derivatives sank high flying energy trader SemGroup LP, which at one time billed itself as the 14th-largest private company in the United States.

[decimon]

This news should boost Kleenex sales.

[Slapshot68]

“A massive $3.2 billion trading loss on oil futures and derivatives”

I think I must celebrate this particular demise.

[coffee260]

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[AU72]

Hope it starts a run.

[Logical me]

They screwed us up, let them sink.

[AndyJackson]

Idiots were short. This hurts us all because it means that the funds pushing prices up are guaranteed a counterparty after they run up the prices. It is not a zero sum game since the rest of us end up with higher prices.

[DoughtyOne]

Heh heh heh, this is what I’ve been waiting for. We took it in the shorts on the way up, and they can take it in the shorts on the way down.

Unfortunately, it’s ultimately the little guy that gets hurt in the end though not matter what.

Those who speculated this up, can go belly up on the way down as far as I am concerned. One down...

[Night Hides Not]

Whatever happened to "the trend is your friend?"

Instead of being a day late and a dollar short, it looks like they were months early and $3.2B short.

That's the Obama style of trading: the confluence of events could not have been fully anticipated (umms and ahhhs were edited out).

I need some expert help...if their daily volume was 500K bbls per day, at $120/bbl the total daily exposure is $60MM. Compared to their $3.2B loss, weren't they "overly hedged", if there is such a term?

[PeaceBeWithYou]

Hedge fund involved is Alerian Capital Management and Elliot Associates

Terry Ronan - Acting President and Chief Executive Officer
Thomas L. Kivisto - Former President and Chief Executive Officer
Kevin L. Foxx - Executive Vice President and Chief Operating Officer
Gregory C. Wallace - Vice President, Chief Financial Officer and Secretary
Brent Cooper - Corporate Treasurer
Roberto Garza Cabello - General Manager Mexico
Alex Stallings - Chief Accounting Officer
Michael Brochetti - Senior Vice President, Finance
Don Spaugy - Vice President, Financial Services
Mickey Euliss - Corporate Controller

Dig in.

[Parmy]

Regardless, this should send shivers throughout the oil futures market. These guys have been churning their purchases and sales for months resulting in the drive up of record oil prices. It looks like the practice has finally caught up to them.

One thing about it, the laws and forces in the market can be put upon and violated for a period of time, but the market has a way of lashing back at those who violate its rules.

[KarlInOhio]

The Tulsa-based SemGroup shorted NYMEX crude oil futures.... SemGroup was forced to recognize a $2.4 billion loss on July 16

Interesting timing. They were forced to recognize the loss on shorting oil right when it would start turning a profit (or at least covering their losses). I wonder who was on the opposite end of that transaction who just made a bundle.

Unlike general investing, most futures and options are zero sum games. This would be the equivalent of someone borrowing to buy gold, only to have their gold reposessed right when gold prices start to climb.

[PeaceBeWithYou]

Add Manchester Securities to that fund list.

[DuncanWaring]

Bears make money, Bulls make money, Pigs lose their shirts.

[muawiyah]

That’s one. There’ll be more.

[Mark was here]

They died before they could make a killing at the pump.

[USFRIENDINVICTORIA]

They were short. They were betting against the speculators you're thinking of.

[wordsofearnest]

Margin call Mr. Duke

[AU72]

“Turn those machines back on!”

[Holicheese]

“I wonder who was on the opposite end of that transaction who just made a bundle”

It was me. Shhhhh, keep it under your hat or i will have Obama Fund Raisers calling me. Already got calls from Hillary for President in 12’!

[wordsofearnest]

“Y’all ain’t nothing but a bunch of bookies”

[Uriah_lost]

They were betting up before they bet down. Their timing was off. They lost. The big story of this is that some of the amateur talent in the game will be scared off.

[decimon]

...Pigs lose their shirts.

All they need is lipstick.

[VRWCmember]

Bears make money, Bulls make money, Pigs lose their shirts.

The proverb actually states "Bears can profit, Bulls can profit, but Pigs get slaughtered."

[DuncanWaring]

Unfortunately, the proverb wasn’t “off the top of my head”. ;-(

[tcostell]

They didn’t screw you up at all, but yes they should be allowed to fail.

[tcostell]

No one “speculated this up”. That’s not how markets work.

[tcostell]

They almost certainly had taken a position in volatility, not price.

[tcostell]

These guys have been churning their purchases and sales for months resulting in the drive up of record oil prices.

Do you know what that sentence means because I don't think you do. And it had nothing to do with what's happened here.

[tcostell]

No that’s not true. They are speculators too. speculators go on both sides of a market, some betting it will go up, and others betting it will go down. They bet wrong.

[DoughtyOne]

Doesn’t oil sell at some market level determined by the ‘spot price’ on the exchanges? Generally commodities sell at a certain margin just above the current spot price.

Speculation in futures does affect this spot price. And if someone gets caught guessing at the wrong move, they can lose a ton of money in a short period of time.

That’s what happened to this concern isn’t it.

The idea that a shortage impacts the price of oil is somewhat misleading. Yes the shortage does affect the price, but why? It’s because speculators bid the price up or down depending on the perceived shortages or over supply.

I do think speculation is what moves the price.

If you can explain why it doesn’t, I’d be glad to listen.

[Parmy]

I think I do! It means that as a trader they buy at a price, the price goes up they sell the contract and take a profit. If they feel the price going up more they rebuy and then sell again.

The process internally drives up the price even though there is no reason for the price to increase based upon the available production and supplies.

Because there are few rules regarding futures trading, it is legal. The practice is illegal in the securities and insurance industries.

[sbMKE]

SEM supplies trucking companies and others heavily reliant on diesel, etc - folks with contracts that are based on hedged positions. SEM goes away and quite a few folks outside the speculator and investor sets get bit, waiting for a fuel truck to arrive and potentially being forced to pay double + for a tank as things get sorted out. Bad news.

[tcostell]

Well it's a complicated thing to explain fully, but to oversimplify,... speculators (to put the term to it's typical misuse) have a very short investment horizon. That means that they'll buy and sell many times per day (or week or month, or whatever). And since that's so, they will bet on the price going both up and down, so they don't actually push the market in any direction, but follow along behind it.

Thanks for asking so nicely. I've had a few weeks here where people who don't understand what I do have been accusing me of everything from ruining their budget to treason just for doing my job.

The fact is, banning speculation (or whatever they think they're going to do) isn't going to affect prices for very long, and it's really just to distract the public away from congress, upon whom this responsibilty should fall.

[tcostell]

Actually that's not so. It doesn't "internally" push up the price. For every buyer there is a seller. If one is buying and the other is selling, why does the price go up instead of down?

The answer is, it doesn't. Price moves with the consensus of value. If people think it will be worth more in the future, then price rises, if they think it will be worth less then it falls. Their buying and selling is just the way that they communicate that information to others. It doesn't actually push prices in any direction.

To "churn" something has a technical meaning in finance that applies to stock brokers not people who are risk managers and traders. If a stock broker buys and sells something in a client account frequently just to generate commissions, it's called "churning". Risk manages don't have "clients" in that sense, just investors. and they don't get paid on commission, they get paid on profit. That's what a speculator does so churning doesn't apply. And even if it did, it doesn't drive up price at all.

[muawiyah]

These guys were probably using oil futures as the "resting point" in a serious game of Parrondo's paradox.

Most folks playing around with Parrondo use something much less volatile than oil futures however.

[DoughtyOne]

I'm afraid you lost me when you said you follow along behind the market.

[USFRIENDINVICTORIA]

Yes, they're speculators. I've tried to make the same point as you many times. A lot of people (including some FReepers) seem to think that speculators are all in the long side of the market; relentlessly driving prices up. When people curse speculators for high oil prices, they're only thinking of the ones who are betting it will go up. That's why I said that these speculators weren't the ones that Slapshot68 was thinking of (I assumed he was only thinking of the speculators who are long.)

Uriah_lost: uriah right — the amateurs (dumb money) will lose big (as we always do). The likes of George Soros will make a killing -- speculators need market movement; they don't care whether it's up or down.

[tcostell]

What drives the price of a market is the consensus estimate of it's future value. If the consensus is that the price should be higher (for whatever reason) then it goes up. If they consensus is that it should be lower, then it goes down. Speculators make money when it goes in both directions, they don't just bet one way. So when its starts going up, they come along for the ride, and when it starts to go down, they do the same.

It's simple really.

[dennisw]

A massive $3.2 billion trading loss on oil futures and derivatives sank high flying energy trader SemGroup LP,

Lots of people got rich there and took money off the table
Suckers were left holding the bag
Hope some more hedge funds bite the dust

[DoughtyOne]

It’s not the consensus estimate that drives the market though is it. It is the tangible actions people take based on that estimate that drives the market.

And every one of those tangible actions must be taken before the market moves, not afterward or following the market. You need to be a good predictor of market forces. If you are not, you won’t last long.

If you buy short and everyone else is still driving the futures contracts higher, you can lose your fortune in a matter of hours. Options are safer, but you can be eaten up by the calls on futures when the market goes against your position.

Do you disagree?

[Parmy]

The major securities industry self-regulatory organizations have rules prohibiting churning and excessive trading. Excessive trading is the same as churning, Churning and excessive trading can violate NASD Rule 2310, NASD Rule 2310-2(b)(2), NYSE Rule 408(c), and NYSE Rule 476(a)(6).

[tcostell]

No... it isn’t. That rule doesn’t apply to risk managers, it only applies to registered reps who do a completely different job.

[tcostell]

I do disagree. The buy sell event actually follows the decision on value rather than preceding (or even coinciding with) it. First you come to the conclusion that you think the price will rise. Once you've decided, then you are prepared to make a buy sell action based on that decision. It's the same for everyone else too.

Your buy-sell activity transmits some public information about your thinking to others and it may then influence how they make their decision, but it isn't guaranteed to do so.

People decide to buy or sell for a lot of different reasons and the buy-sell decisions of others are only a tiny part. Yet they all change their minds all the time. that's the part that comes first, and actually "drives" price.

Options are (In the most general terms) less safe because they apply leverage that it takes some skill to understand. you can also lose 100% of your principle on options fairly easily where that's more difficult to do with other instruments.

[tcostell]

Why? What did a hedge fund ever do to you? (other than provide a big boost to the return on your pension fund investment?)

[DoughtyOne]

I think you’re missing a very big point. You have to execute an order, before the market moves. So saying you follow the market is not accurate.

Your order and other orders are what drives the market. And you have to hope your order was with the majority of orders, or you lose.

You can’t make a dime out of following the market. You have to be ahead of the market.

I could say, the market went up yesterday. I better buy. Would I have made money on the market move? No. The only way I could have made money on that move, was by placing an order before the move. Any order you place now, will make or lose you money on what the market does after you lock in your order.

[tcostell]

No I'm not missing anything. This is how I make my living and I've made a great deal of money at it for my employers over the last 20 years. When you said:

"You have to execute an order, before the market moves."

Thats just incorrect. Those orders don't drive the market, the ever changing opinions of the people "making a market" is what moves the market. It may be influenced by the buy and sell decisions of others but not exclusively so. And the market moves all the time without any orders getting executed at all. The markets move every night even though the exchanges are closed and there is certainly no orders being executed.

Now making money in the market... that's another question entirely. That's a discussion about why you might think one thing or another about the future value of the market and that's a much more complex question.

[dennisw]

I don’t like hedge funs going long on oil and forcing energy prices up the last few years. These idiots are partly (PARTLY!) responsible for the energy bubble. Which has deflated the last few weeks. I follow energy sector stocks

Natual gas got up to $13.50
It is now at $10
That’s a 25% loss

We shall see

[tcostell]

First of all there is no energy bubble. If you think so then you don't know what a bubble actually is. The major media dimwits toss that word around as if it can mean whatever they want it to, but they don't know what it means either. I do know what it means... it's my singular area of expertise and there is no bubble in the energy market.

Second of all, hedge funds have not "pushed prices up" at all. The people responsible for high energy prices are not hedge funds but Congress. Hedge funds are no more responsible for high energy prices than plumbers are responsible for high prices of water.

If you really need a villain so badly be angry at Congress.

[DoughtyOne]

No I'm not missing anything. This is how I make my living and I've made a great deal of money at it for my employers over the last 20 years.  I'm not saying you haven't.  I do think you need to address reality though.

When you said:  "You have to execute an order, before the market moves."  Thats just incorrect.  Bud, if you are not holding paper and the commodities move, you don't make any money off the movement.  In that case you are on the sidelines.  If you're holding product after having purchased it, and the market moves and you can sell that product at an increased price fine, but you have to have taken some tangible action or you are simply on the sidelines.  If you have made money, you had a position before a market move.

Those orders don't drive the market, the ever changing opinions of the people "making a market" is what moves the market. It may be influenced by the buy and sell decisions of others but not exclusively so. And the market moves all the time without any orders getting executed at all. The markets move every night even though the exchanges are closed and there is certainly no orders being executed.  Is the CBOT the only place that takes commodity orders?  I would suspect there are instruments of some sort that are traded around the world on commodities.  Those affect the opening prices.  If not then brokerages that open before the market affect the opening price.  Limits affect the price, if predeterming targets trigger buying or selling, but some predetermined decision and action had to take place before the market move.

Now making money in the market... that's another question entirely. That's a discussion about why you might think one thing or another about the future value of the market and that's a much more complex question.

Look, you can do an interview and find that 100% of the commodities purchasers think the market is going up and if none of them had taken new positions, the market would not reflect their views.

Something tangible has to occur before the market moves.

Please tell me one way you can make money off the commodities market without having taken a position before the market moves.

[decimon]

Just noticing your tagline.

Barak is Ehud.

Barack is Obama.