Ex-Vitol Oil Trader to Launch Hedge Fund As SemGroup Investigation Wraps Up

The death of the "commodity supercycle" has one of the bigger stories of the last year - speculative trading, compounded by frenetic activity in the derivatives markets overwhelmed the physical markets, leading to the biggest booms and busts we have ever witnessed in a wide range of commodities.

The CFTC oversees it all, but was hopelessly outmatched as hot money poured into commodities - just as it was crowned the latest, and greatest "asset class". Hedge funds were buying grain elevators and Goldman and Morgan Stanley elbowed their way into the bull market in a big way. Indeed, it would appear regulators were overwhelmed as they attempted to keep tabs on it all:

August 21, 2008
Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.

But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol's portfolio -- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange. Washington Post

The CFTC, which learned about the nature of Vitol’s activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.

Was the CFTC data incorrect? Did the Washington Post get the story wrong?

Something does not seem right - and Vitol abruptly exited the business soon thereafter, no doubt uncomfortable having to spend quality time with regulators wearing cheap suits:

January 8th
Andrew Serotta, a former Vitol Group oil trader, said he was asked to leave a Houston-based unit of the closely held commodities firm because the company wanted to focus on physical commodity markets rather than more “visible” derivatives trading.

Serotta, 38, departed Vitol Capital Management, which operated “essentially a hedge fund,” because Vitol “did not want to move forward in the derivatives world, but remain focused instead on physical trading,” he said in a telephone interview from Houston late yesterday.

Vitol’s decision to “shrink” its involvement in the derivatives trading used at Vitol Capital Management was linked to the reclassification of the unit’s trades by U.S. regulators as speculative, Serotta said. Bloomberg

Serotta, predictably, is apparently starting a hedge fund, hoping to become the next John Arnold. And while his experience should prove invaluable, it appears nobody at Vitol is taking ownership of the 11% position in open interest Vitol held last July at the NYMEX, just as oil futures ramped into a blowoff high that bankrupted SemGroup.

Hmmm....hopefully his short term memory issues won’t hurt fund raising. I usually know what positions are on my sheets, but I am funny that way. It must have been a sprawling operation at Vitol. But nice trade...I hope someone at Vitol claimed it at bonus season.

Meanwhile, Louis Freeh has wrapped up his investigation into SemGroup collapse - did the company’s ex-management bring on all the problems? Another case related to SemGroup has been filed, this one against the commodity trading arm of Goldman Sachs:

The commodity-trading arm of Goldman Sachs, meanwhile, was sued this week in federal court in Muskogee in a SemGroup-related case. Several Oklahoma oil and gas producers filed a class-action petition seeking nearly $190 million from J. Aron & Co., the Goldman Sachs subsidiary that reportedly signed off on buying more than $400 million worth of oil and gas from SemGroup before the bankruptcy.

Hundreds of producers were left out in the cold when SemGroup declined to pay up to $1 billion owed for oil and gas it picked up in the month before the bankruptcy petition, reports say. Tulsa World

I knew that shooting against weak hands can make for a good trade, but this is ridiculous. It might have been the most profitable trade of 2008....

John Catsimatidis said Thursday that he buys into the theory that hedge funds may have used insider knowledge of SemGroup’s short position on the direction of future oil prices and made counter moves that helped drive the Tulsa energy company into bankruptcy.

The theory, reported in a story on Forbes magazine’s Web site this week, echoes the beliefs of some traders that Goldman Sachs, Merrill Lynch and other investment firms knew that SemGroup was overwhelmingly committed to selling short. Those fund traders bid up on long positions and allegedly played a part in driving oil prices to a record $147 per barrel just before SemGroup filed its Chapter 11 petition, some reports say.

The New York billionaire said: “My feelings are that certain hedge funds were dealing on inside information, knew SemGroup’s position and were taking the opposite position. There was money to be made.”

SemGroup made the mistake of showing Goldman their books and positions in an aborted attempt to raise cash. Shortly thereafter they were out of business - as oil spiked despite plenty of inventory in storage, as the inventory data now confirms.

Please don’t let this happen to you. And stay on your toes - there are people out to get you. Or at least relieve you of your assets under management.

BTW, isn’t about time we heard from Goldman, who last I knew were trying desperately to jawbone crude higher in August when Ospraie’s largest hedge fund imploded and the commodity rout picked up in earnest.

Unfortunately the collapse in oil prices is killing the supply side of the equation, and a sustained upturn in global growth could light a fire under crude. Enjoy $2 gasoline, it probably won’t last forever.
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Vitol Trader Asked to Go as Firm Shifted Its Strategy
Bloomberg

Ex-Vitol Trader to Start $100 Million Oil Hedge Fund
Bloomberg

Catsimatidis thinks others hurt SemGroup
Tulsa World

Complete SemGroup Coverage
Tulsa World

What a character—Billionaire John Catsimatidis Speak to SemGroup Employees
Video
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