Hedging with oil prices nowadays has become synonymous with playing with fire. And the latest victim of such a conflagration is a company which had once been amongst the largest in the world. On Tuesday, the privately-owned SemGroup, an oil marketing company based in Tulsa, Oklahoma, filed for Chapter 11 bankruptcy protection brought under by the increasing cost of trading oil in a time of record prices.

The company, ranked the 12th largest private entity by Forbes last year, was forced to curtail its futures trading operations two weeks ago because of a lack of funds and because physical oil dealers were unwilling to work with the company, participants in both markets say.

It racked up the massive $3.2 billion losses as oil prices ran up record gains, undercutting short crude futures positions SemGroup bought to hedge against its 500,000 barrel-per-day trading business.

To meet obligations, SemGroup plans to sell off oil and natural gas gathering, transportation, and storage assets worth an estimated $6.14 billion that were purchased in a whirlwind of acquisitions since it was founded in 2000.

"We have determined that the best way to maximise value for our creditors is to undertake a sales process that will transition our valuable businesses to well-established companies," Terry Ronan, SemGroup's acting chief executive, said in a statement.

Shares in SemGroup's publicly-traded subsidiary, SemGroup Energy Partners, which operates pipelines and terminals that mainly transport its parent company's oil, have plunged 50 per cent since 16 July.

On that day, SemGroup took a $2.4 billion loss on July 16 after it transferred its New York Mercantile Exchange oil futures trading account to Barclays Plc, converting what they called "loss contingencies" into an actual loss.

The company was done in by volatility in the crude and credit markets that transformed a routine oil price hedging strategy into a lethal liability.

SemGroup had engaged in regular hedging transactions with BOK Financial Corp, where former CEO Thomas Kivisto had been a board member since 2006 before resigning on July. As of the end of 2007, SemGroup had hedged 21 million barrels of crude oil with BOK, which had a fair value of negative $130 million.

As of the end of March, this position was worth negative $88 million, said BOK spokesman Jesse Boudiette, who declined to comment on BOK's current exposure to SemGroup saying the bank would not speak publicly about individual clients.

Had oil prices risen two years ago, when borrowing was easier, SemGroup would probably have ridden out its problems. Instead, SemGroup went under, and could still drag its public subsidiary down with it.

The subsidiary is now under the management of two of its parents' creditors, which said on Tuesday that they would move forward as an independent pipeline company.

SemGroup Energy Partners, the public subsidiary, is not liable for its parent's trading debts. But despite the separate corporate structures, both businesses remained closely linked.