Tue Sep 19th, 2006 at 09:08:38 AM EST
Just a brief diary to point out that the entry of hedge funds into the commodity speculation game isn't a one way street where they take average Joe's money.
Check this out. It shows that the conjecture I've been making that big time speculators are making the oil markets more volatile and that when they snap, they are a big cause of the washouts we've seen in natgas and gasoline.
Enormous losses at one of the nation's largest hedge funds resurrected worries yesterday that major bets by these secretive, unregulated investment partnerships could create widespread financial disruptions.
The hedge fund, Amaranth Advisors, based in Greenwich, Conn., made an estimated $1 billion on rising energy prices last year. Yesterday, the fund told its investors that it had lost more than $3 billion in the recent downturn in natural gas and that it was working with its lenders and selling its holdings "to protect our investors."
from the diaries with minor edits. - Jerome
I wish I had $100 for every oil speculator I watched blowup while I was in the biz (came close a time or 2 myself).
This loss is associated with the Nat gas price collapse this spring. I've got a nice bottle of wine to bet that you see similar reports in about 6 months re this gasoline/crude price collapse in August to now.
I don't agree that the oil markets are manipulation free. I just don't see some over-arching conspiracy that can move heaven and earth to interfere with electoral politics. And seasons do remain seasons regardless of when voting occurs.
Chris Cook has it right re the clearing houses:
In fact they are "single points of failure", undercapitalised in respect of the risks they run and vulnerable to major market "discontinuities" when - not if - a posse of hedge funds, coupled with investment bank proprietary positions riding on their backs - one day go for an exit of massive positions they have quietly taken on OTC - an exit which is simply not there.
this is what happens when a big player(s) gets stubborn and bucks the world or when the conventional wisdom proves to be bogus. When they want to exit, the market drops a huge % as those on the other side just stand aside and watch until they finally see a reason to close their opposing positions. That happens close to historical norms.
In GWI, Elf had a huge position in forward jet sales. They probably sold at the normal $20-30/mt over gasoil (diesel) for a year out to airlines. When the s--t hit the fan, that spread blew out to $175-200/mt as the US bought up the world's jet supply to move mateial to the middle east. FYI, the new tanks operate on a common fuel = jet.
Elf's management tried to wait it out, but lost their nerve. Their traders had to buy out of the position at $160-175/MT. IIRC it was a $30 million or so loss. Small enough that it got lost in a big Oilcos balance sheet but people were fired and the group was trimmed. By the time the position was actually pricing in the outer periods, the spread was back down to $30.
Happens all the time. Neste did something similar on crude and wiped out their trading desk about 1995.
Remember the Hunts on silver and Mr Copper at Sumitomo(?). BSD's that ended up little squeaking bankrupt retirees.