Sign in Subscribe
Computer industry

Oil and Gas Prices Plummet, Dragging a Hedge Fund Down with Them

Strategic Insights

— 2 min read

Energy prices took a sharp drop, driven by fading concerns about disruptions in supply and signs of slowing economic growth. The plummeting prices had an unexpected consequence: a hedge fund, Amaranth Advisors, lost an estimated $3 billion due to its heavy bets on high energy prices. Corporate profits remained strong, and the Federal Reserve's decision not to raise interest rates buoyed the Dow Jones industrial average. Additionally, the market reversed as some statistics suggested economic growth might be slowing more than traders had anticipated.

Key Takeaways:

  • Oil prices tumbled almost 20 percent over the last six weeks, from nearly $77 a barrel to less than $61.
  • Natural gas prices fell even further, closing under $5 per 1,000 cubic feet.
  • Amaranth Advisors, a hedge fund, lost an estimated $3 billion due to its heavy bets on high energy prices.
  • The fund sold all of its energy contracts to raise cash and avoid liquidation by its creditors.
  • In a letter to investors, Amaranth said it had lost 65 percent of their money so far this month.
  • The Federal Reserve's policy makers voted to keep interest rates unchanged, spotlighting the slowing economy.
  • Chrysler Group, a unit of DaimlerChrysler, announced it would cut production by 16 percent, or about 90,000 vehicles, due to slumping sales of sport utility vehicles.
  • Four government auditors accused the Interior Department of suppressing their attempts to recover more than $30 million from energy companies that were cheating the government out of royalties for oil from publicly owned waters in the Gulf of Mexico.
  • Hewlett-Packard's chairwoman, Patricia R. Dunn, resigned from the board as the company's spying scandal showed no sign of dying down.

Statistics:

  • Oil prices dropped 20 percent over six weeks: from nearly $77 to less than $61 a barrel.
  • Natural gas prices fell from $8.50 to under $5 per 1,000 cubic feet.
  • Amaranth Advisors lost an estimated $3 billion due to its energy bets.
  • 90,000 vehicles: Chrysler Group's planned production reduction.
  • 65 percent: Amaranth's losses so far this month.
  • More than $30 million: Amount auditors say energy companies owed the government in royalties.

Sources:

  • "Oil Prices Tumble, Amaranth Advisors Loses $3 Billion, A Chip That Can Transfer Data Using Laser Light", The New York Times, no date given.
  • "Suits Say U.S. Impeded Audits for Oil Leases", The New York Times, no date given.
  • "Chrysler to Cut Production, Ford and GM Reach Deals with UAW", The New York Times, no date given.
  • "Hewlett-Packard's Chairwoman Resigns Amid Spying Scandal", The New York Times, no date given.

Read more