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Oil Report

UPDATE 4-Japan's Mitsui uncovers $81 mln hidden naphtha losses

(Adds details of overall losses para 7)

TOKYO/SINGAPORE, Nov 21 (Reuters) - Japanese trading titan Mitsui & Co. 8031.T, the nation's most aggressive player in oil markets, said on Tuesday its Singapore unit had lost $81 million in bad bets on falling naphtha markets.

Japan’s second-biggest trading firm said a 35-year-old trader had falsified data since spring to cover up the losses, which as of Nov. 17 represented about 10 times last year’s profits at Mitsui Oil (Asia) Pte. Ltd. The unit trades more than half of all Asian naphtha, a product used as a petrochemical feedstock.

The losses, while just 3 percent of parent Mitsui’s forecast annual profit, prompted it to close all futures and derivatives positions across oil and petroleum markets at the unit, and will likely hit liquidity in Singapore, still haunted by the half-billion dollar meltdown of China Aviation Oil two years ago. [nSP251231]

“The significance of MOA’s existence has vanished as of today,” Takashi Yamashiro, deputy chief operating officer at Mitsui’s energy business unit, told a briefing in a trembling voice.

Mitsui's disclosure comes as volatile oil and commodities markets claim a host of victims, from U.S. hedge fund Amaranth Advisors, which lost $6 billion on U.S. natural gas earlier this year, to the $94 million loss on metals futures at Samsung Corp.'s 000830.KS Hong Kong unit in mid-2005.

Mitsui, which discovered the losses after a regular internal review of trading operations earlier in November, said it would tighten monitoring over the Singapore subsidiary and decide in the future whether to maintain the unit, which employs 32 traders for futures and physical crude and products.

MOA’s pre-tax losses in the period to Nov. 17, including profitable positions on other markets, came to about $63 million, it said.

Still, Mitsui said it saw no change in its net profit forecast of 300 billion yen ($2.54 billion) for the business year to March 31, 2007. Before the news, shares in Mitsui ended down 0.3 percent at 1,491 yen, while the main Nikkei average .N225 ended flat.

The company did not name the trader in question, but said the individual was 35 years old, had been working for Mitsui since 2001 and was the only person responsible for trading naphtha.

It has not fired him from the company and officials said it was unclear what, if any, legal action would be taken.

“Apparently, he was trying to recover the loss by taking time,” said Yamashiro.

The incident recalled Singapore’s most infamous trading scandal, in which Nick Leeson tried to hide mounting losses on Nikkei futures, eventually causing the collapse of Barings Bank.

BAD NEWS FOR NAPHTHA

Noriyuki Yamazaki, the jovial, stocky 30-something trader who heads the unit’s naphtha team and plays goalkeeper for the MOA football team in local tournaments, declined to comment on the losses to Reuters when approached at the company’s offices.

Only one other person, Singaporean Sharon Tan, works on the naphtha desk.

Oil players in Singapore were already bracing for the anticipated downturn in trading volume that has typically followed similar meltdowns, such as China Aviation Oil’s $550 million losses on options and derivatives trades in 2004.

Over the past six months, Mitsui Oil Asia was involved in more than half of all the trades in Tokyo open-specification naphtha, the benchmark forward contract for the product.

“This is really bad news for the industry,” said a trader at a South Korean petrochemical producer.

Speculation over what had caused Mitsui’s losses ran rife.

Some traders said it might be a case of a simple long position gone bad, as naphtha NAF-1H-TYO plunged 20 percent from its record-high near $670 a tonne in July.

Naphtha’s premium to crude also halved from June to October amid a flood of Indian exports and unexpectedly lacklustre demand in Asia, where plants scheduled year-end maintenance.

Others said the losses might have been linked to a collapse in the cost of freight between Singapore and Tokyo, which fell by 58 percent in mid-August to a more than four-year low last week.

The main derivative contract for Asian naphtha is based on Singapore prices, while the benchmark forward contract is based on prices in Tokyo, with freight rates making up the difference.

“It seems a typical failure of risk management,” said an official with a trading company in Tokyo.

“I can just speculate that there was no strict division of front, middle and back office -- so no independent objective decision could be made to stop the loss.”

While the failure is likely to prompt a close investigation of trading safeguards, it may not mean the end of MOA. Other companies which have logged oil trading losses have shut down specific desks or units, but continue to operate in the market. ($1=118.03 Yen) (Additional reporting by Ikuko Kao in Tokyo, Jiwon Chung and Neil Chatterjee in Singapore)

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