Energy Traders Lobby for Funds to Avoid Liquidity Crisis

(Bloomberg) -- Europe’s energy traders are lobbying central banks and governments for urgent funding as the industry faces cash-calls running into the billions of dollars due to soaring commodity prices.

The European Federation of Energy Traders is petitioning for “emergency funding mechanisms” in order to prevent some traders from experiencing liquidity problems that could lead to financial contagion, according to a letter viewed by Bloomberg. Members of the industry group include Shell Plc, TotalEnergies SE, Vitol Group and Mercuria Energy Group Ltd. among others.

“Since the end of February 2022, an already challenging situation has worsened and more energy market participants are in a position where their ability to source additional liquidity is severely reduced or, in some cases, exhausted,” according to the letter, which was first reported on by Risk.net on Monday.

EFET executive vice chair Peter Styles said that guarantees exchanges and clearing members would be backstopped in the event of defaults would allow them to provide greater amounts and more flexible margin to companies during this currently volatile period for prices. 

“The main objective is to ensure that there is still an accessible​, orderly market in energy futures, particularly for gas and power producers and suppliers who need to hedge in these difficult times,” he said in a telephone interview. “There’s concern about orderly markets in energy futures and then the liquidity and depth of those markets, so that hedging is still doable, for the benefit of the whole European economy.”

Prices of commodities from grains and metals to natural gas and oil have jumped at an unprecedented rate as Russia’s invasion of Ukraine set off a scramble to source alternatives to one of the world’s top raw-materials producers. In these circumstances margin calls -- demands to deposit additional funds with brokers and exchanges to cover part of the value of commodities contracts -- have become a major drain on traders’ cash reserves. 

The shock and its potential to impact outside the commodities sector was highlighted in the market for nickel, where prices rose so sharply they triggered margin calls larger than some brokers on the London Metal Exchange would have been able to pay. The exchange canceled a day’s nickel trades and halted transactions on its contract to prevent effective defaults, Chief Executive Officer Matt Chamberlain said at the time. 

“Market participants, clearing members and clearing houses are currently encountering major challenges in managing the impact of the current geopolitical situation,” according to the letter. “Massive price movements on European energy exchange markets have resulted in massively increased margin requirements for market participants.”

Providing guarantees against margin calls would require substantial commitments from institutions.

“If you add up all of the margin calls that some of the biggest traders face, who are in addition oil and gas companies or utility companies, we’re talking about billions rather than millions,” Styles said.

©2022 Bloomberg L.P.