Unipec suffers $688mn losses over ‘inappropriate hedging’

Bloomberg

China’s oil refining giant said its trading unit lost almost $700 million last year after being wrong-footed by zigzagging markets, revealing one of the biggest losses by a commodity trader in the last decade.
Sinopec blamed the losses at its Unipec unit in part on “inappropriate hedging techniques” and said it closed its positions after discovering the problem. Oil plunged sharply in late November and December, prompting speculation that Unipec may have contributed to the drop as it unwound contracts.
The Unipec blunder, compounded by other charges, prompted Sinopec to release a full-year net income estimate that’s below expectations, according to analysts at Sanford C. Bernstein & Co. and Bloomberg Intelligence.
The trading loss marks a sharp reversal for Unipec, which grew over the last 25 years to become one of the largest and most aggressive oil traders. With operations spanning London to Singapore, the company trades about 5 million barrels a day, according to people familiar with the matter, putting it ahead of other giant merchants such as Glencore Plc and Trafigura Group.
Sinopec said its trading arm reported operating losses of $688 million for the full year of 2018. That means the underlying trading loss could have been larger, but offset by other gains. The company declined to provide further details.
‘MARKETS TURNED’
“Unipec played with probably lousy controls and lost as markets turned,” said Jean-Francois Lambert, a former commodity trade finance banker at HSBC Holdings Plc and
industry consultant.
“Beijing will be very upset and Unipec, if it survives, will be given very tight guidelines: ensure
sufficient supply and that’s it.”
Sinopec, officially known as China Petroleum & Chemical Corp., also expects to take a 10 billion writedown on upstream and refining assets, as well as a 15 billion yuan inventory loss, Morgan Stanley’s Andy Meng said in a research note after the company held a call with analysts.
Refining companies typically book inventory losses after oil prices drop and they revise the value of crude and fuel in storage.
The troubles at Unipec were unearthed as prices began to crash in the final quarter of last year. Brent crude, the global benchmark, tumbled from nearly $87 in October to just below $50 after Christmas.