Sunday, 21 December 2014

The perils of the stock market (Part 3)

In the era of increasing oil prices, investors may think that oil companies have escalating profits and investing in them are safe and sure bets.

China Aviation Oil (Singapore) Corporation Ltd is an investment holding company engaged in the supply and trading of jet fuel.  It operates in three segments: Middle Distillates, Other Oil Products, and Investments in Oil-Related Assets. 

CAO(S) was a stock darling after its IPO in 2001, with its prices surged as much as sevenfolds, as the company announced plans to refine, store and trade oil in Singapore, the Middle East and Europe.

In 2004, CAO(S) shares ran up and peaked in March 2004 as it planned to purchase Singapore Petroleum Co. from Keppel Corp.

It was all rosy outlook for CAO(S) and investors have no inkling of the shocker about to come. 

4. $550 Million Bad Bet - CAO(S)

On Nov. 25, 2004, CAO(S) sought protection from its creditors in the Singapore High Court, having lost an estimated $550 million in a series of disastrous bets on the price of oil.  Its shares were suspended from trading on the Singapore Stock Exchange.  It was down closed to 50% since its peak in March 2004.

Actually, CAO(S) began speculative oil derivatives trading in the second half of 2003 and bet its own money rather than simply executing trades for clients.

CAO(S) thought the price would fall, and when it didn't, kept repeating the bet hoping that the market would turn and in the end sunk into one of the biggest derivatives losses in years.

The trading loss was closed to CAO(S) market value meaning the company essentially worth $0, after taking into account the huge loss.  CAO(S) sought help from its parent, China Aviation Oil Holding Co., to cover the loss.

The market has no way to know the full extent of CAO(S)'s exposure to these speculative derivatives until losses or profits were realised.  Hence, analysts covering CAO(S) are not aware of that until CAO(S) asked for Court protection from creditors.

Fast forward ten years.  With the oil prices getting lower and lower these days, perhaps CAO(S)'s bad bet on oil prices in 2004 could turn into good bet in 2014......


  1. a decade too early on the bets.....

    1. Hi David,

      It's all about timing in the market. A winner for one person could be a loser for another person.


    2. Passive Income Farmer,

      I was one of the curious on-lookers then in 2004.

      Nah! Those derivative trades would have been still under water 10 years on...

      CAO was on the wrong side of the trade betting WTI would not cross above $50 ;)