SEMGroup Roils Oil Market But Questions Linger

by StockJockey

Thursday, July 24, 2008 - 7:18 pm

How much of the recent gyrations in oil can be pinned on the trading follies at SEMGroup? Tough to say, the oil market is a mystery wrapped in an enema wrapped in a riddle. Or something like that, you get the idea.

SEMGroup has a publicly traded subsidiary, SEMGroup Energy Partners LP (SGLP-NASDAQ) which blew up on July 17th. The publicly traded arm operates 1,200 miles of pipelines and maintains 15 million barrels of oil storage capacity, with about half of that residing at the Cushing, Oklahoma hub. And while there might be few secrets in Cushing, getting to the bottom of this mystery will not be easy.

The company was active in the physical market and the futures market, although accounts of their activities remain sketchy. It would seem they were mis-hedged somehow, or perhaps a "rogue" trader at the firm put on short bets that were crushed in the oil gap, and spike, of Friday, July 11th. Oil levitated through the following Monday and into the 15th of July, when comments from Ben Bernanke over the fragile state of the economy were widely attributed to sinking the price of oil. Yeah right. Although stating the obvious continues to have its moment in these crazy markets, nobody has believed Bernanke for months, and the demand destruction thesis has been known for weeks.

The spike in oil apparently caused a major margin call for SEMGroup, and they transferred their futures account to Barclays on July 16th. But, assuming they were short, the damage was done on from the 11th to the morning of the 15th. Perhaps someone was gunning for them, jammed the price and forced them to cover on the 52-week highs.

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Crude Oil (USO-AMEX) cracked on July 15th, after a nasty two days...of covering by SEMGroup?

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The decline in oil since the 15th of July has been dramatic. But it was too late for SemGroup, and on the 17th of July their publicly traded LP gapped lower as the news was released. Ultimately SEMGroup lost $3.2 billion dollars.
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Did you buy SEMGroup (SGLP-NASDAQ) on July 16th? You lose.

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Of course, while the CFTC busted a small Dutch energy prop trading firm today, accusing several principals of “banging” the market, in a fairly inept fashion, to make $1 million, there are clearly bigger hijinks going on.

And while pointing your finger at Morgan Stanley and Goldman Sachs might not be fair, the futures marts are a zero sum game, and chances are part of SEMGroup’s $3.2 billion loss might have ended up in the hands of the Wall Street titans, who have enough clout to intimidate regulators, and keep them at bay.

The energy markets are the biggest casino’s in the world, and the regulators are clueless, and somewhat powerless, to stop the shenanigans. The CEO of the NYMEX was on Fast Money tonight crowing about the bust, but nailing a couple of Dutch prop traders, who are clearly without any well placed friends, is not that impressive to me.

C’mon Washington, quit blowing smoke up our ass. Paulson, Cox, Bair, and the CFTC etc are a bunch of bad actors. All the proposed regulatory actions are going to chase capital out of the country, and the markets will be more rigged than they were a year ago.

The markets were complete chaos today, and cynicism is printing 52-week highs.
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SemGroup Energy says SEC conducting inquiry
Reuters

Update: New article with additional color-SEMGroup’s CEO lost $290 million trading a separate account within SEMGroup

SemGroup’s $3.2 billion failure shocks backers
Reuters

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Comments:

The lack of transparency in US is still better than elsewhere. And you know my opinion on big firms gunning for smaller firms who have gone too far out on a limb. Do you think someone was gunning for these guys specifically or trying to shakeout the whole market? These are some of the reasons why “When Genius Failed” is one of the most interesting books on modern investing; I wish more books were written the subject.

Posted by on 07/24/2008 at 07:44 PM

Gartman put something out apparently but I have not seen it. Certainly the played a role in the blowoff peak, but I certainly don’t have a problem taking advantage of weak hands and running their stops so to speak.

I think the Morgan Stanley call on June 6th stinks to high heaven, I think maybe they saw the demand destruction, they and or clients were long, and manufactured a reason to issue a call that set up one of the biggest one day moves ever.

They were able to sell into the ramp and here we are.

I clearly have watched the movie Syriana too many times, and cannot put my finger on it exactly. But there are only about 1,000 people here who know what is going on, they are too busy playing the game and not talking.

Crazy, ISI Group said if we crack $121 on the futures we might lift to 1320 on the S&P;500, keep it in mind.

just some scrambled thoughts from the back of my deranged mind.

Posted by on 07/25/2008 at 11:10 AM

The rigging is something that is bustable. If the Sec can put no naked short selling on 19 key financials, why not put no naked short or long selling on oil. Make them put up or buy 50-percent, then the fun begins. All that will need to be done is watch the oil price go down to $75/barrel, and clean up the dead financial bodies.

Posted by Howard Gibson on 07/27/2008 at 02:08 PM