Europe’s largest energy traders have called on governments and central banks to provide “emergency” assistance to avert a cash crunch as sharp price moves triggered by the Ukraine crisis strain commodity markets.
In a letter seen by the Financial Times, the European Federation of Energy Traders — a trade body that counts BP, Shell and commodity traders Vitol and Trafigura as members — said the industry needed “time-limited emergency liquidity support to ensure that wholesale gas and power markets continued to function”.
The plea follows severe disruptions in commodity markets initially sparked by the pandemic, but significantly worsened in recent weeks by Russia’s invasion of Ukraine.
“Since the end of February 2022, an already challenging situation has worsened and more [European] energy participants are in [a] position where their ability to source additional liquidity is severely reduced or, in some cases, exhausted,” EFET said in its letter, dated March 8 and sent to market participants and regulators.
It was “not infeasible to foresee . . . generally sound and healthy energy companies . . . unable to access cash”, the letter warned. People familiar with the matter said EFET members had raised the issue with central banks.
Ructions in commodity markets stemming from the invasion of Ukraine are starkest in nickel, an important Russian export. Global markets for the metal were shut for a week after prices shot higher and left those with bearish bets struggling to meet banks’ demands for cash to cover derivatives positions, known as margin calls.
But prices for oil and gas, where Russia plays a central role, have also rocketed since the war began. Futures linked to TTF, Europe’s wholesale gas price, surged almost 200 per cent over four days earlier this month. In some cases, variation, or mark-to-market margin, in the gas market have increased 10 times from one day to another.
EFET wants state entities such as the European Investment Bank or central banks, such as the European Central Bank or the Bank of England, to provide support through lenders, to soften the impact of margin calls.
“The overriding objective is to keep an orderly market for futures and other derivative energy contracts open,” said Peter Styles, executive vice-chair of the EFET board, in an interview. “Gas producers, European gas importers and power suppliers must retain the opportunity to hedge their positions.”
Styles said it was possible to hedge risk without exchanges, but added that market participants needed the “liquidity, depth and visible price signals which futures exchanges with central clearing provide”.
Central banks provide emergency liquidity during times of market stress to stem cash flow problems at solvent institutions. Generally, lenders pledge collateral in exchange for emergency loans. It is unclear exactly how any assistance for commodity market participants would work.
The existence of the EFET letter was first reported by Risk magazine.
Europe’s central bankers do not comment on specific requests for assistance. Some may be reluctant to help trading firms that often make large profits from shifts in commodity prices.
However, senior ECB officials are keeping a close eye on global commodity markets. ECB vice-president Luis de Guindos said last week that derivatives, including commodity derivatives, were a “very specific market that we are looking at very carefully”.
Speaking at a conference on Wednesday, Rostin Behnam, chair of the Commodity Futures Trading Commission, the top US derivatives regulator, said appropriate margins must “unfailingly” be maintained.
“We must hold fast to our regulatory structures and resist the urge to make ad hoc decisions to avoid the natural outcomes of market forces,” he said.
The clearing banks that provide services to trading platforms such as ICE Endex, based in the Netherlands, the UK-based ICE Futures and the European Energy Exchange, based in Germany, can access liquidity from their national central banks.
Exchanges play a vital role in global commodity markets by providing trading houses with futures contracts to manage risk. Without these instruments, most traders would not be able to move physical commodities. That makes margin requirements and clearing limits on commodity futures critical to global flows of oil and gas.
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One senior trader said the initial margin for a wholesale European gas contract plus the extra cushion demanded by clearing banks was now getting close to the value of the contract. He said it was not a “functioning market”.
In its annual report, published on Wednesday, Glencore, one of the world’s biggest commodity traders, highlighted the “ability to finance margin payments” as one of the risks facing the industry.
Already, hedging activity has shrunk according to traders in the oil market. The amount of outstanding futures linked to oil has dropped to multiyear lows in recent weeks.
As a result, refiners are receiving fewer offers in their tenders for crude oil. Uruguay’s state oil company received just four offers in a recent crude tender. It typically receives 15, according to traders.
Additional reporting by Philip Stafford