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Swot Analysis Of Metallgesellschaft Ag ( Mgag )

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Metallgesellschaft AG (MGAG) was formerly an industrial conglomerate with 251 subsidiaries. Their United States (U.S.) subsidiary, Metallgesellschaft Refining and Marketing (MGRM), was responsible for U.S. petroleum markets. In December 1993, MGRM reportedly lost $1.3bn.

In December 1991, MGRM’s management team - led by A.Benson - key marketing strategy was to offer long-term customers fixed price guarantees for up to ten years on petroleum products. This is known as short positions on long-term forward contracts. Short position implies that MGRM were selling the commodity with the expectation that prices will fall; it’s sold via a forwards contract, a privately agreed contract to sell the commodity at a predetermined price and date in …show more content…

MGRM held futures amounting to 55m barrels whilst entering into Over-The-Counter (OTC) energy swaps amounting to 110m barrels. These privately negotiated swaps are agreements, allowing counterparties to swap commodities at a floating price for a fixed price. MGRM hedged long-term oil commitments against spot oil price increases on a one to one basis, by purchasing a “stack” of short-term futures equivalent to their remaining delivery requirements. Meaning that MGRM placed an entire hedge in short dated contracts as opposed to spreading it out over a longer duration, settling the expiring instruments then using the proceeds to purchase new instruments. Instead of purchasing and storing oil for future sales, MGRM adopted a synthetic storage strategy, allowing them to store oil supplies via futures without having to physically store any. Allowed MGRM to capitalize on their skills of extracting maximum profits from marketing oils without the gamble on direction of spot rates.

Nevertheless, the fluctuant nature of the energy sector saw markets shift from backwardation to contango. Contango exists when the spot price is lower than the futures price. This meant that MGRM’s long futures were being rolled over into the next set of “stacked” positions, with losses. As a result, these unrealized “rollover losses” incurred huge margin calls. These calls are a demand by NYMEX, for when a deposit of cash is required to bring the account balance up to its

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