How Trafigura Lost $254 Million On Oil And Gas Hedges | 3/11/2012 | Staff
kimskims (Posted by) Level 3
LONDON (Reuters) – One of the world’s biggest traders, Trafigura, booked a $254 million loss from oil and gas market hedges last year, highlighting the challenges traders face when taking large loans to protect against price swings in illiquid commodities.

To be sure, those losses are on paper and could be eliminated or turn into gains in the future if the market turns in Trafigura’s favor. Or they could get bigger if the opposite happens.

Hedging - Losses - Trafigura - Profit - Year

The hedging losses at privately owned Trafigura, which made a net profit of $873 million last year, have not been previously reported.

Like many other trading houses, Trafigura has moved into the fast-growing, global market for liquefied natural gas (LNG).

Traders - Vitol - Gunvor - Glencore - LNG

Privately owned traders Vitol and Gunvor and listed Glencore are also expanding in LNG and said they were using hedges to protect their exposure in that sector.

In 2018, Trafigura signed a deal with U.S. company Cheniere to buy LNG for 15 years and export it to Europe and Asia. On signing the deal, Trafigura hedged its exposure to U.S. LNG prices against sharp price moves in the rest of the world.

LNG - Risks - Trafigura - Report - Auditor

But hedging LNG is complicated and contains risks, says Trafigura’s own 2018 report and its auditor PwC, which reviewed and signed off on Trafigura’s accounts for last year.

To hedge the deal, Trafigura had to rely on a combination of liquid prices such as those of U.S. natural gas or Brent crude and assumptions on the correlation of those liquid benchmarks to illiquid global LNG prices for up to five years forward.

Hedge - One - Moment - Trafigura - Source

“This hedge is not perfect but it is the best one available out there at the moment,” a Trafigura source said. As the LNG market develops, he said, more instruments will appear.

“It is extremely difficult to effectively hedge these long-term contracts, especially in a new market like LNG,” said...
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