An “inefficient” futures market may lead to sharp fluctuations in energy prices
Europe’s energy sector faces a A perfect storm as a dysfunctional future market It may lead to a new crisis as prices rise due to a liquidity crunchto me Reuters. Sharp market fluctuations in natural gas and electricity prices since the Russian invasion of Ukraine have left some oil and gas companies without the funds to hedge their physical trades if they cannot meet margin calls, an exchange requirement for additional collateral to secure trading positions when prices rise…
“we’ve got Dysfunctional futures marketWhich one, then? It creates problems for the physical market and leads to High prices and high inflationA senior trade source told Reuters.
in March , The lack of liquidity became evident When commercial companies, utilities, oil majors and bankers sent a letter to governments and financial institutions such as the European Central Bank for emergency liquidity to support energy markets as prices rose.
A wave of traders hedging their physical positions with short financial exposure in the derivatives markets were pressured by the surge in spot prices due to the invasion and forced to cover as increased exchange requirements imposed margin calls.
Market players usually borrow to build short positions in the futures market, where 85-90% of banks come from. About 10-15% of the short sale value, known as the minimum margin, is covered by the traders’ own money and deposited into the broker’s account.
But if the funds in the account are less than the minimum margin requirement, in this case 10-15%, it calls a ‘margin call’. – Reuters
today The difficult situation ahead of winter is that increased margin requirements to secure deals are draining capital at major NatGas, commercial companies and energy utilities..
Some companies and Trading desks call it quits Because of the high margin requirements, which has led to a decrease in market participants – which eventually led to a squeeze in liquidity, allowing for more volatility that could drive prices up.
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Major bankers and traders said that stock exchanges, clearing houses, and brokers have Initial Margin Requirement Increase To 100% -150% of the contract value of 10-15%. For example, the ICE exchange requires margin rates of up to 79% on Dutch gas futures contracts.
The letter sent by the European Union of Energy Traders in March said that “the same company that would normally expect to see daily margin cash flow related to price movements of around €50 million, is now facing variable margin requirements of up to €500 million within the business day.”
as we are Hinge Earlier this month, many Companies are finding it increasingly difficult to manage margin calls.
Norway’s state-owned Equinor, Europe’s largest gas trading company, recently warned that energy companies, with the exception of Britain, need at least 1.5 trillion euros to cover margin calls.
An ECB policymaker disputed this figure and said losses are much lower in the worst case scenario.
Saad Rahim, chief economist at Trafigura, noted last week One warning sign of a lack of liquidity in the commodity markets:
“Open interest and volumes have decreased significantly as a result of what is happening on the margins …it will eventually have an effect on the physical volumes that are traded because actual traders need to hedge. ”
European officials have even discussed plans to Energy derivatives markets suspended As a form of intervention to prevent what some believe could lead to The collapse of “Lehman Style”.
Helge Haugane, Equinor’s Senior Vice President Gas & Energy, said recently in an interview that “Liquidity support will be needed. ”
So far, countries like Germany have Nationalization of failed facilities Like Uniper SE. The question becomes the scale of the crisis and whether the ECB will need to get involved this winter if prices rise due to a lack of liquid markets, leading to more margin calls. It seems that Europe is caught in a death cycle.
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