One of the world's biggest traders, Trafigura, booked a $254 million (£195 ...
LONDON - 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.
Like many other trading houses, Trafigura has moved into the fast-growing, global market for liquefied natural gas . 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.
To hedge LNG, pipelines and refining Trafigura built a short position with a fair value loss of around $1.9 billion using liquid instruments such as Brent, U.S. natural gas and diesel. Fair value gains and losses impact both balance sheet and profits as they are included in the cost of sales. “Level 3 gives a lot of flexibility to commodity traders as in practice future prices are whatever the trader has decided they would be,” Iceberg’s Vagner said.As losses from the shorts exceeded gains from the longs, Trafigura had to book a $254 million loss representing a reduction of 22 percent of the potential net profit it would have otherwise achieved in 2018.
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