Saturday, September 21, 2019
Friday, September 20, 2019
Unauthorized trades disguised as transactions for customers
Mitsubishi still assessing if trades will impact earnings
Mitsubishi Corp. said a rogue oil trader at its Singapore unit lost $320 million in unauthorized transactions disguised as legitimate hedges for customers.
The employee, a Chinese national working at Petro-Diamond Singapore Pte, has been fired and reported to police, Mitsubishi said in a statement, declining to name him. The trader, hired in November 2018 to handle oil business with China, “repeatedly” engaged in the unauthorized deals since January, disguising them to “look like hedge transactions,” the parent company said.
A person familiar with the matter identified the trader as Wang Xingchen, also known as Jack Wang. Calls to Wang’s mobile phone wouldn’t connect, while a person who answered the phone at Petro-Diamond’s Singapore office said he has left the company. No other current contact details were available.
|Metallgesellschaft AG||$1.2 billion||Oil hedging strategy failed||1994|
|China Aviation Oil||$550 million||Wrong-way speculative oil trades||2004|
|Mitsui & Co.||$81 million||Hidden bad naphtha trades||2007|
|Unipec||$656 million||Wrong-way bets on crude oil||2018|
|Petro-Diamond||$320 million||Unauthorized oil derivatives trading||2019|
A loss of $320 million would be less than one-tenth of Mitsubishi’s projected profit for the year. In August, the giant trading house, the biggest of Japan’s so-called sogo shosha, forecast full year net income of 600 billion yen ($5.6 billion).
The oil market has a long and colorful history of trading busts. Metallgesellschaft AG suffered a $1.2 billion loss in 1994 when a hedging strategy failed. In 2004, China Aviation Oil suffered its infamous $550 million blunder, when the company fell afoul of a surge in prices.
Another Japanese trading company, Mitsui & Co., was forced to close its Singapore oil-trading unit in 2007 after a trader lost $81 million in hidden naphtha trades. The dealer and his supervisor were imprisoned. And in December last year, two top officials at Chinese oil trading giant Unipec were suspended following losses of about $656 million.
Beyond oil, another Japanese trading house Sumitomo Corp. suffered the worst ever rogue trading event in commodities in 1996 when Yasuo Hamanaka lost $2.6 billion dealing copper on the London Metal Exchange.
In the latest scandal to befall the industry, Mitsubishi said the employee manipulated data in Petro-Diamond’s risk management system so that the transactions appeared to be associated with actual trades with customers.
“Large losses from derivatives trading” were incurred since July as the price of oil dropped, and the unit began an investigation into the transactions in the middle of August when the employee was absent from work, Mitsubishi said. Brent oil, the international benchmark, dropped 16% from its July peak of $67.01 to as low as $56.23 in the first week of August.
Petro-Diamond quickly closed the derivatives positions once it realized they could result in losses for the company and also determined that they weren’t associated with any transactions with customers. Mitsubishi said investigations confirmed that its unit had “sufficient internal controls in place.”
The trader was fired Sept. 18 and reported to police the next day. The Singapore Police Force confirmed that a report has been lodged, while declining to give any other information.
Petro-Diamond Singapore had revenue of $6.7 billion in the year ending March 2018 and EBIT of $18 million, according to the financial profile filed with the city’s accounting regulator.
— With assistance by Grace Huang, Serene Cheong, Stephen Stapczynski, Alfred Cang, Aaron Clark, and Andrea Tan
Thursday, September 19, 2019
Wednesday, September 18, 2019
Oil surged the most in more than a decade after a devastating attack on Saudi Arabia intensified concerns about growing instability in the world's most important crude-producing region.
In an extraordinary start to the week's trading, Brent futures in London leaped a record $12 a barrel in early trading Monday before settling just above $69 for the biggest one-day gain since 2008. Prices may remain elevated after Saudi officials downplayed prospects for a rapid recovery of production capacity.
Saudi Aramco faces weeks or months before most output from its giant Abqaiq crude-processing complex is restored, according to people familiar with matter. Saudi Arabia's Foreign Ministry said Iranian weapons were used in the attacks on Saudi Aramco, while the U.S. blamed Iran for the attacks.
For oil markets, it's the worst sudden supply disruption ever. The attacks that damaged a key processing complex and one of the Saudi's marquee fields highlight the vulnerability of the world's biggest exporter. The crisis also means a "new geopolitical premium" of about $5 a barrel, Mizuho Securities USA's Paul Sankey wrote in a note.
"We have never seen a supply disruption and price response like this in the oil market," said Saul Kavonic, an energy analyst at Credit Suisse Group AG. "Political-risk premiums are now back on the oil-market agenda."
Meanwhile, U.S. Energy Secretary Rick Perry told CNBC that a "coalition effort" will be needed to counter Iran, which the Trump administration said was behind the attacks.
Haven assets including gold and U.S. government debt surged as investors fled riskier instruments. Currencies of commodity-linked nations including the Norwegian krone and the Canadian dollar also advanced. U.S. gasoline futures jumped 13%.
State-run producer Saudi Aramco lost about 5.7 million barrels a day of output on Saturday after 10 unmanned aerial vehicles struck the Abqaiq facility and the kingdom's second-largest oil field in Khurais. A Saudi military official earlier said preliminary findings showed that Iranian weapons were used in the attacks but stopped short from directly blaming the Islamic Republic for the strikes.
The disruption surpasses the loss of Kuwaiti and Iraqi petroleum output in August 1990, when Saddam Hussein invaded his neighbor. It also exceeds the loss of Iranian oil production in 1979 during the Islamic Revolution, according to the International Energy Agency.
"The vulnerability of Saudi infrastructure to attacks, historically seen as a stable source of crude to the market, is a new paradigm the market will need to deal with," said Virendra Chauhan, a Singapore-based analyst at industry consultant Energy Aspects Ltd. "At present, it is not known how long crude will be offline for."
Aramco officials are growing less optimistic that there will be a rapid recovery in production, a person with knowledge of the matter said. The kingdom -- or its customers -- may use stockpiles to keep supplies flowing in the short term. Aramco could consider declaring itself unable to fulfill contracts on some international shipments -- known as force majeure -- if the resumption of full capacity at Abqaiq takes weeks. Alternatively, the kingdom's own refineries may cut runs just to keep crude exports flowing, according to analysts with JBC and Energy Aspects.
Declaring force majeure would rattle oil markets further and cast a shadow on Aramco's preparations for what could be the world's biggest initial public offering. It's also set to escalate a showdown pitting Saudi Arabia and the U.S. against Iran, which backs proxy groups in Yemen, Syria and Lebanon. Iran-backed Houthi rebels in Yemen claimed credit for the attack, but U.S. President Donald Trump and Secretary of State Mike Pompeo have already blamed Iran.
Trump, who said the U.S. is "locked and loaded depending on verification" that Iran staged the attack, earlier authorized the release of oil from the nation's emergency reserves. The IEA, which helps coordinate industrialized countries' emergency fuel stockpiles, said it was monitoring the situation.
Brent for November settlement rose 15% to $69.02 on ICE Futures Europe. The global benchmark could rise above $75 a barrel if the outage at Abqaiq lasts more than six weeks, Goldman Sachs Group Inc. said.
On the New York Mercantile Exchange, West Texas Intermediate futures for October delivery settled up 15% at $62.90, the highest close since May 21. Brent's premium to WTI for the same month closed at $6.35 a barrel.
The drama wasn't limited to flat prices. The spread between Brent and WTI widened as much as 37%, showing that the oil spike will affect global prices more than those in the U.S., where shale output and ample supplies provide more of a buffer.
--With assistance from Nayla Razzouk, Javier Blas, Anthony DiPaola, Michael Roschnotti and Tina Davis.
©2019 Bloomberg L.P.
Tuesday, September 17, 2019
Officials say ‘severe’ disruption will last weeks or months
Aramco tells customers some October shipments to be delayed
The oil market is facing a prolonged disruption to Saudi Arabia’s oil production with few options for replacing such huge output losses.
The weekend attacks on the kingdom eliminated about 5% of global oil supply -- and raised the risk of more conflict in the region -- propelling Brent crude to a record surge on Monday. Officials at state oil company Saudi Aramco have become less optimistic on the pace of output recovery, telling a senior foreign diplomat they face a “severe” disruption measured in weeks and months and informing some customers that October shipments will be delayed.
The historic price gain underscores the unprecedented nature of the disruption caused by the drone attack on the Abqaiq crude processing plant. For decades, Saudi Arabia has been the oil market’s great stabilizer, maintaining a large cushion of spare production capacity that can be tapped in emergencies, such as the 2011 war in Libya.
The halt of 5.7 million barrels day of the kingdom’s production -- the worst sudden supply loss in history -- exposes the inadequacy of the rest of the world’s supply buffer.
“The market is in scramble mode to secure not only supplies of crude, but also products,” consultant JBC Energy GmbH said in a note. Prices are “reflecting a new geopolitical risk premium, namely that the safety of oil production in the heart of the Middle East cannot be guaranteed.”
Tehran and Riyadh are historic foes that have been backing opposite sides in Yemen’s long-running civil war. The volatile situation in the region finally boiled over earlier this year as U.S. President Donald Trump used sanctions to attempt to choke off all of Iran’s oil exports -- which are the lifeblood of its economy -- after he unilaterally withdrew from an international nuclear deal.
Since then the Persian Gulf, source of about a third of the world’s seaborne oil exports, has been under siege -- targeted by air, sea and land. While Trump has shown some reluctance to go to war, there are also few prospects for easing tensions as Saudi Crown Prince Mohammed bin Salman decides how to respond to the assault.
Houthi rebels in Yemen, who are backed by Tehran, said on Monday that oil installations in Saudi Arabia will remain among their targets and their weapons can reach anywhere in the country. Iran’s supreme leader Ayatollah Ali Khamenei said on Tuesday that his country won’t negotiate with the U.S. on any level neither in New York or anywhere else.
Saudi Aramco is firing up idle offshore oil fields to replace some of the lost production, said a person familiar with the matter. Customers are also being supplied using stockpiles, though some buyers are being asked to accept different grades of crude. The kingdom has enough domestic inventories to cover about 26 days of exports, according to consultant Rystad Energy A/S.
Trump also authorized the release of oil from the country’s Strategic Petroleum Reserve, while the International Energy Agency, which helps coordinate industrialized countries’ emergency fuel stockpiles, said it was monitoring the situation.
According to Bloomberg calculations based on publicly available data, the absolute maximum in spare capacity that could be brought into production in the coming weeks is about 3.9 million barrels a day.
The true volume of viable backup supply could be significantly lower, because it includes restarting production from the Neutral Zone shared by Saudi Arabia and Kuwait, as well as tapping the kingdom’s own spare capacity, much of which may also have to be processed at the Abqaiq or Khurais facilities and therefore be unusable.
Other participants in the OPEC+ cuts, such as Russia, Kazakhstan and the United Arab Emirates, could restore a few hundred-thousand barrels a day of production, not enough to offset the Saudi losses.
The Organization of Petroleum Exporting Countries is in regular contact with the Saudi authorities, the group’s Secretary-General Mohammad Barkindo said in a Bloomberg TV interview. It’s premature to talk about reversing the oil-production cuts implemented by OPEC and its allies, he said.
U.S. output may be booming, but the country’s many shale drillers hold little to no output in reserve. Oil production has plateaued at an average level of 12.37 million barrels a day since recovering from the impact of Hurricane Barry at the end of July.
Output will continue to grow and more than 10 new export terminals have been proposed for U.S. crude, capable of handling about 8 million barrels a day, but the first of these is unlikely to be operational before 2022 at the earliest.
Crude prices pared gains on Tuesday, following an extraordinary trading day in which Brent crude leaped settled a record 15% higher at just above $69. Futures were 1.7% lower at $67.87 a barrel as of 12:09 p.m. in London as the market waited for any further update from Aramco.
Saudi Energy Minister Prince Abdulaziz bin Salman is scheduled to hold a press briefing on Tuesday evening in Jeddah.
Images released of the damage to Abqaiq’s stabilization towers, which separate gaseous compounds from crude oil, suggest lengthy repairs, according to Phillip Cornell, a former senior corporate planning adviser to Aramco.
“They can take weeks or months to get specialized parts,” he said at an event hosted by the Atlantic Council in Washington on Monday. Five out of 18 stabilization towers appear to have been taken out and the pictures that have been released show “very specific, accurate targeting of those particular infrastructures,” he said.
In addition to the immediate loss of supply, the attack raised the specter of U.S. retaliation against Iran, which could further inflame oil prices. While Houthi rebels in Yemen claimed responsibility for the assault, President Trump said it looked like Iran was to blame.
“I don’t want to have war with anybody” but our military is prepared, Trump said at the White House on Monday.
— With assistance by Christopher Sell, Evan Sully, and Will Kennedy