http://uk.reuters.com/article/oilRpt/idUKN2227689520080722 UPDATE 1-Failed oil hedges sink energy trader SemGroup LP Tue Jul 22, 2008 3:34pm BST By Robert Campbell NEW YORK, July 22 (Reuters) - Energy trader SemGroup LP filed for bankruptcy on Tuesday after a failed oil hedging strategy left the fast-growing firm short of cash, its publicly traded unit, SemGroup Energy Partners LP (SGLP.O: Quote, Profile, Research), said in a regulatory filing. Tulsa, Oklahoma-based SemGroup, which billed itself as the 14th-largest privately held U.S. company, had sold short NYMEX crude oil futures as a hedge against a decline in value of the oil it purchased as part of its 500,000 barrels per day trading business. The bankruptcy filing affects approximately $2.6 billion of debt issued by SemGroup and its units. Publicly traded SemGroup Energy Partners and its general partner are not part of the bankruptcy filing, SGLP said. Two hedge funds took control of SGLP's general partner last week under the terms of a loan they had made to SemGroup. (Editing by Tim Dobbyn)
At .5M bpd it does not take much movement to do lots of damage. Looks like they took a big short position somewhere near the gutter and it went up on them.
Problem typically is a cash flow squeeze. Futures are marked to market and clearinghouses will continually make margin calls as prices rise. Also, if the price of the physical commodity you are long rises less quickly than the short futures hedge, you lose. If there was any speculative short selling outside of normal hedging practices, that would obviously contribute to losses as well.
It's obvious the "hedge" in futures was a much larger position than Sem's production/inventory in the underlying. Obtaining credit to make margin calls on a truly hedged position is readilly available.
This is ANOTHER reason that eventually, human traders will disappear from financial firms, and secured, heavily-tested and heavily-guarded ALGORITHMIC trading will take over.