Europe’s biggest energy traders have called on governments and central banks to provide “emergency” aid to avert a liquidity crunch as sharp price swings triggered by the Ukraine crisis weigh on commodity markets.
In a letter seen by the Financial Times, the European Federation of Energy Traders – a trade body which counts BP, Shell and commodity traders Vitol and Trafigura among its members – said the industry needed a “ time-limited emergency liquidity support to ensure wholesale gas and electricity markets continued to function”.
The plea follows severe disruptions in commodity markets initially triggered by the pandemic, but significantly worsened in recent weeks by Russia’s invasion of Ukraine.
“Since the end of February 2022, an already difficult situation has worsened and more [European] energy participants are in [a] position where their ability to find 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.
Turmoil in commodity markets resulting from the invasion of Ukraine is most pronounced for nickel, a major Russian export. Global metal markets were closed for a week after prices soared and left those betting on the downside struggling to meet banks’ demands for cash to cover derivatives positions, known as margin calls .
But oil and gas prices, where Russia plays a central role, have also soared since the start of the war. Futures contracts linked to TTF, Europe’s wholesale gas price, jumped nearly 200% in four days earlier this month. In some cases, the variation, or mark-to-market, in the gas market has increased 10 times from day to day.
The 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, in order to mitigate the impact of margin calls.
“The overriding objective is to keep an orderly market open for futures and other derivative energy contracts,” Peter Styles, executive vice chairman of the EFET board, said in an interview. “Gas producers, European gas importers and electricity suppliers must retain the ability to hedge their positions.”
Styles said it was possible to hedge risk without exchanges, but added that market participants need “the liquidity, depth and visible price signals that centrally cleared futures exchanges provide.”
Central banks provide emergency liquidity in times of market stress to stem the liquidity problems of solvent institutions. Typically, lenders promise collateral in exchange for emergency loans. It’s unclear exactly how any aid to commodity market players would work.
The existence of the EFET letter was first reported by Risk magazine.
European central bankers do not comment on specific requests for assistance. Some may be reluctant to help trading companies that often make large profits from swings 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 watching very closely”.
Speaking at a conference on Wednesday, Rostin Behnam, chairman of the Commodity Futures Trading Commission, the main U.S. derivatives regulator, said appropriate margins must be “unfailingly” maintained.
“We need to stick to our regulatory structures and resist the urge to make ad hoc decisions to avoid the natural results of market forces,” he said.
Clearing banks that provide services to trading platforms such as ICE Endex, based in the Netherlands, ICE Futures, based in the UK, and 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. This makes margin requirements and clearing limits on commodity futures essential for global oil and gas flows.
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A senior trader said the initial margin for a European wholesale gas contract, plus the additional cushion required by clearing banks, was now approaching the value of the contract. He said it was not a “functional market”.
In its annual report, released on Wednesday, Glencore, one of the world’s largest commodity traders, highlighted the “ability to fund margin payments” as one of the risks facing the industry.
Already, hedging activity has declined according to oil market traders. The amount of outstanding oil-related futures has fallen to multi-year lows in recent weeks.
As a result, refiners receive fewer bids in their crude oil tenders. Uruguay’s state-owned oil company received just four bids in a recent crude oil tender. He usually receives 15, according to traders.
Additional reporting by Philip Stafford