• 4 minutes Energy Armageddon
  • 6 minutes How Far Have We Really Gotten With Alternative Energy
  • 10 minutes Russia Says Europe Will Struggle To Replace Its Oil Products
  • 2 hours GREEN NEW DEAL = BLIZZARD OF LIES
  • 1 hour Reality catching up with EV forecasts
  • 2 hours A Somewhat Realistic View of the Near Future for Electric Vehicles Worldwide
  • 13 hours "Natural Gas Price Fundamental Daily Forecast – Grinding Toward Summer Highs Despite Huge Short Interest" by James Hyerczyk & REUTERS on NatGas
  • 10 days US Oil Independence is a myth and will always be a myth
  • 6 days The Federal Reserve and Money...Aspects which are not widely known
  • 11 days Oil Stocks, Market Direction, Bitcoin, Minerals, Gold, Silver - Technical Trading <--- Chris Vermeulen & Gareth Soloway weigh in
  • 15 days Natural gas price to spike when USA is out of the market
  • 14 days "Biden Is Running U.S. Energy Security Into The Ground" by Irina Slav
  • 14 days *****5 STARS - "The Markets are Rigged" by The Corbett Report

Breaking News:

Freeport LNG Gets Regulatory Approval

Erdogan Cracks Down On Critics Ahead Of Elections

Erdogan Cracks Down On Critics Ahead Of Elections

As elections loom in Turkey,…

Diesel Markets Brace For A Chaotic February

Diesel Markets Brace For A Chaotic February

The EU embargo on Russian…

Oilfield Firms See Highest Profit In Nearly A Decade

Oilfield Firms See Highest Profit In Nearly A Decade

The world’s largest oilfield services…

ZeroHedge

ZeroHedge

The leading economics blog online covering financial issues, geopolitics and trading.

More Info

Premium Content

“Dysfunctional” Futures Market May Lead To Sharp Energy Price Swings

  • Low liquidity in futures markets may spark the next major price increase in energy commodities.
  • High margin requirements have forced some smaller players out of the market.
  • Senior bankers and traders said exchanges, clearing houses, and brokers had increased initial margin requirements to 100%-150% of contract value from 10-15%.

Europe's energy sector is facing a perfect storm as a dysfunctional futures market may lead to a new crisis where prices move higher due to a liquidity crunch, according to Reuters Sharp market swings in natural gas and electricity prices since Russia's invasion of Ukraine have left some oil and gas companies without the necessary funds to hedge their physical trades if they cannot satisfy margin calls, an exchange requirement for extra collateral to guarantee trading positions when prices rise...

"We have a dysfunctional futures market, which then creates problems for the physical market and leads to higher prices, higher inflation," a senior trading source told Reuters.

In March, the lack of liquidity became apparent when trading firms, utilities, oil majors, and bankers sent a letter to governments and financial institutions such as European Central Bank for emergency liquidity to shore up energy markets as prices surged. 

A flurry of traders who hedged their physical positions with short financial exposure in derivative markets were squeezed by soaring spot prices due to the invasion and forced to cover as increased exchange requirements forced margin calls.

Market players typically borrow to build short positions in the futures market, with 85-90% coming from banks. Some 10-15% of the value of the short, known as minimum margin, is covered by the traders' own funds and deposited with a broker's account.

But if funds in the account fall below the minimum margin requirement, in this case 10-15%, it triggers a 'margin call.' --Reuters

Today's challenging situation ahead of winter is that increased margin requirements to secure trades are sucking up capital at NatGas majors, trading firms, and power utilities

ADVERTISEMENT

Some firms and trading desks have called it quits due to high margin requirements, which has led to a decline in market participants -- ultimately causing liquidity to shrink, allowing for even more volatility that could send prices higher

Related: Putin Orders First Russian Troop Mobilization Since World War II

Senior bankers and traders said exchanges, clearing houses, and brokers had increased initial margin requirements to 100%-150% of contract value from 10-15%. For Example, the ICE exchange demands margin rates of up to 79% on Dutch TTF gas futures. 

The letter sent by the European Federation of Energy Traders in March said, "the same company which normally expects to experience daily margin cash flows related to price movements of around 50 million euro, now faces variation margin requirements of up to 500 million euro within a business day." 

As we detailed earlier this month, many companies are finding it increasingly challenging to manage margin calls

Norwegian state-owned firm Equinor, Europe's top gas trader, recently warned that energy companies, excluding in Britain, need at least 1.5 trillion euros to cover margin calls

ADVERTISEMENT

One European Central Bank policymaker disputed that figure and said losses are much less in the worst-case scenario. 

Last week, Saad Rahim, chief economist at Trafigura, pointed out one warning sign due to the lack of liquidity in commodity markets: 

"Open interest and volumes have come down significantly as a result of what is happening on the margining ... will ultimately have an impact on the physical volumes that are being traded because physical traders need to hedge." 

European officials have even discussed plans to suspend power derivative markets as a form of intervention to prevent what some believe could trigger the next 'Lehman Style' meltdown

Helge Haugane, Equinor's senior vice president for gas and power, recently said in an interview that "liquidity support is going to be needed." 

So far, countries like Germany have nationalized failed utilities such as Uniper SE. The question becomes how big the crisis is and if the ECB will need to get involved this winter if prices soar higher due to a lack of liquid markets, triggering even more margin calls. Europe appears to be locked in a death loop. 

By Zerohedge.com 

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage


ADVERTISEMENT


ADVERTISEMENT



Leave a comment

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News