7-23-08 by dugan
The Wall Street Journal’s Brian Baskin today nails down both ends of a mystery in oil markets. The collapse of the little-known SemGroup, a pipeline and storage company as well as major oil trader, may have helped push the oil futures market down in recent days. But before that, the company’s frantic trades may have kept the price rising. Most of the story is behind the WSJ subscription barrier, but here’s the gist of it:
The collapse this week of SemGroup LP, a little known private oil-marketing firm, may have played a role in crude oil’s 14% drop over the past 10 days.
The Tulsa, Okla., company filed for Chapter 11
bankruptcy protection Tuesday, citing among other financial woes a loss
of at least $2.4 billion in crude-oil futures. Changes in its hedging
strategies coincided with big moves in oil recently.The company had taken out short positions, or bets
that crude prices would fall, as a hedging strategy for oil it intended
to move through a subsidiary’s pipelines and sell to refiners,
according to an affidavit filed in Delaware bankruptcy court by
Terrence Ronan, SemGroup’s senior vice president, finance. Then, when
oil prices rose, SemGroup moved to "cover" its short positions by
taking out equivalent long positions, or bets that oil prices would
rise.Eventually, SemGroup was unable to put up collateral
for its swelling bets and sold its futures account to Barclays Capital
on July 16, according to the affidavit. SemGroup officials couldn’t be
reached for comment. A spokesman for Barclays declined to comment.The firm had $14.7 billion in revenue as of 2006, the
last year for which there are public records. Its publicly traded
subsidiary, SemGroup Energy Partners LP, operates about 1,200 miles of
oil pipelines and controls 15 million barrels of oil storage capacity,
including seven million barrels at Cushing, Okla., a storage hub
closely tracked by the oil market.One theory making the rounds in the market is that as
SemGroup’s long positions snowballed, so did the oil rally. SemGroup’s
rapid exit from the market removed a force for upward momentum when the
market, under siege from negative U.S. economic indicators, needed it
most.
I love the timing of this story. It’s breaking–and there’s a lot more to be figured out–just as the Bush administration’s own regulators assure us that they have investigated, and oil prices are merely responding to supply and demand.
Here’s the money quote from the guy in charge at the Commodity Futures Trading Commission:
"This staff report reflects the collective knowledge of some of our
government’s best economists," said CFTC chief economist Jeffrey
Harris, who chairs the task force.
The task force will
report further on its work later this year. Maybe it should just leave the investigating to the Journal.