A real hedger doesn't lose. say you wish to buy oil next month at $50 and that's where the future is trading. You go buy your hedge. Then come the day you want the physical oil you buy at noon and then sell his hedge off simultaneously (or just does an efp -- trades oil for futures) he at most loses the bid/ask. No harm.
Some big sellers (say a Scandihooligan) sell large quantitiies of physical oil off of the IPE settles on a derivative basis. That is, they use the settle to price a physical sale without going through the futures for most of the oil. So another player(the buyer) can trash the settle with a much smaller quantity and gain a profit. The problem is letting the other side have leverage.
there are easy solutions to the problem
Thanks, exactly what I wanted Chris to ackowledge. "It's the statue, man, The Statue."
But the real hedgers don't have the advantages of the guys sitting in the middle in terms of access to data and order flow.
And if a Big Oil company is in cahoots with a Big Investment Bank - a not unlikely scenario - then other market players can get doubly screwed.
All you have to do is:
(a) add up the profits made by Goldman Sachs, Morgan Stanley energy desks - not to mention BP's trading profits - and ask yourself why the top people in the Banks got where they did; and (b) why every other investment bank is queuing up to poach energy teams from their competition; and (c) why star energy traders head for hedge funds, because they don't see why their employer should get so much of the profit THEY are making; and the $64 billion question (d) at whose expense are these multi billion "super-profits" (I don't begrudge trading profits, by the way) being made?
The answer to that is hedging "end user" producers and consumers, and, increasingly, hedge funds. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
