A German industrial group lost around $1.3 billion hedging long-dated fuel supply contracts with short-dated futures, destroyed not by a bad view but by rolling costs and margin calls.
The firm had sold customers fixed-price fuel for up to ten years and hedged with a stack of front-month futures, rolling them forward each month. The hedge was directionally sound: if oil rose, the futures gained and offset the loss on the supply contracts.
Two things broke it. The curve flipped from backwardation to contango, turning positive roll-yield into a monthly bleed. And the futures losses had to be paid in cash immediately through variation-margin while the offsetting gains on the customer contracts would not arrive for years. The parent liquidated the hedge near the bottom, crystallising the loss.
It remains the standard case study in the difference between economic hedging and cash-flow hedging: a hedge that is right on paper can still bankrupt you if the timing of the cash flows does not match.
Example: a stack of 50,000 contracts rolling at a 40-cent monthly contango costs 0.40 x 1,000 x 50,000 = $20 million a month in roll cost alone, before any price move, against receivables that pay out over a decade.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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