China threatens to default on oil derivatives trades

Filed under: International markets, Management, Commodities, Oil, Financial Crisis

About one year after the Lehman bankruptcy, we are getting rumors of more impending bankruptcies, this time from China.

The problem started last year when the price of oil dropped from $147 to $32 per barrel. Many companies use the futures markets to hedge their buying of oil. When prices skyrocket, they get scared and buy futures contracts for future delivery to lock in a price and to be assured of getting the product. So, some companies were buying oil at the height of the market last year. Companies that place hedges usually leave them on until delivery. What happened was that when the price of oil collapsed, these companies were still holding high-priced contracts. They saw the price plummet and took horrendous losses.

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China threatens to default on oil derivatives trades originally appeared on BloggingStocks on Sat, 12 Sep 2009 16:10:00 EST. Please see our terms for use of feeds.

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