Central banks unlikely to offer immediate support to energy markets
Central banks have intensified talks with energy trading companies calling for help to ease market tensions caused by the war in Ukraine, but they are unlikely to release additional support immediately, according to sources. people aware of their discussions.
Top energy market leaders spoke to the Bank of England and the European Central Bank this week to express concern over sharp rises in commodity futures, which are hampering risk management and threatening the fluidity of physical assets in the world.
Senior BoE officials are keen to understand how to ease tensions in futures markets and are aware of potential risks to global trade, people familiar with the matter said. But the central bank believes existing facilities already provide a cushion against a potential worsening of market conditions.
“I think there has been quite an active debate between regulators, central banks and banks about how we solve this,” said Jeremy Weir, executive chairman of commodities trader Trafigura. “We are doing our part by talking to these various institutions and regulators to at least say these are the circumstances of the market. . . We need some form of liquidity to get back into the market,” he said at the FT Commodities Global Summit in Switzerland on Tuesday.
Russell Hardy, chief executive of Vitol, another of the world’s biggest commodity traders, said participation in the spot gas market has declined due to the cost of trading.
To move a cargo equivalent to one megawatt-hour of liquefied natural gas priced at €97, traders must provide €80 in cash, putting a strain on their capital needs, Hardy said.
“The depth and liquidity of the gas markets would normally prevent something like this from happening – the price doubling in one day,” he said.
Traders rely on networks of terminals, storage facilities and maritime fleets to ensure the movement of major commodities around the world. But they also need financial markets, which help them set minimum prices for future dates and manage the risk of prices moving against them when the products are delivered. This is usually done through contracts indexed to commodity prices from exchanges such as ICE Futures Europe and Chicago’s CME Group. Most European energy contracts are managed in London, under the supervision of the BoE.
The BoE and ECB declined to comment. The British regulator, the Financial Conduct Authority, claims to be in “close contact with financial companies active in the energy markets”.
Russia’s invasion has driven up the cost of the raw materials it produces, such as oil and gas, and Ukrainian exports, including wheat. This means that traders’ hedges against falling prices have become very shortfalling, triggering demands for more margin.
These margins are returned to traders when the products are delivered, but in the meantime trading companies may face liquidity constraints. This is particularly a problem for small businesses that do not have access to large lines of credit.
An industry group representing Europe’s biggest energy traders – including Shell and BP and major German utilities – appealed for help in a letter this month. Many traders want central banks to support clearinghouses and banks, so that they in turn have less need to increase traders’ margins.
Eurozone officials have ruled out any direct support for the commodities industry, arguing that any explicit support or guarantees should come from governments or development banks.
Last week, Rostin Behnam, chairman of the Commodity Futures Trading Commission, America’s top derivatives regulator, said a lot of collateral remained in the global financial system after the volatility of March 2020, when markets convulsed on the markets. Covid concerns.
“I think it acted as a good buffer as we’ve had to deal with the shock over the past two weeks. Nothing came to the CFTC or to me personally that was overtly concerning,” he said.
However, he urged market participants to share their concerns. “It is useful that we talk about this so that we can work collectively to mitigate any risks that may arise.”
(Additional reporting by Laura Noonan.)