Jan 12, 2005

A must read piece on oil.

This is probably the best primer on the oil market I have ever seen. This is a small excerpt about CAO which had some interesting numbers.

China Aviation Oil was the country's largest crude and refined products trading firm, and while I don't know much of the story about the company's demise, I roughly know that they put when they should have called and called when they should have put. For anyone not familiar with the language of commodities trading, that means they bet that prices would go down when they went up and bet they would go up when they went down. Upon its demise, brought on after the government in Beijing refused to bail the company out (crony communist rulers willing to allow a big company to go bust; would our crony capitalists be so bold?), the company had staked out $500 million in bad positions, mostly in West African light, sweet crudes.

Some believe that when it is all over, China Aviation Oil may rack up $1.5 billion in losses.

A lot of crude oil traders, especially those east of Suez, had to quickly unwind long positions designed to take advantage of China Aviation Oil's rapacious need. A large number of tankers full of West African crude were suddenly stuck without destinations. Those tankers were not unwanted for very long, however, and most got snapped up and sent to alternate destinations in the Americas and Europe.

Logic dictates, however, that even with the demise of China Aviation Oil, demand in China for gasoline has probably not really fallen any. Eventually, West African crude exports to China will pick up as other firms step in to fill that demand. Whether that will provide any more oomph to crude markets in the coming year remains to be seen.

This is a tiny portion of a great article, I encourage people when they have time to go check out the original.

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