Energy Trade Body Requests Cash Assistance To Cope with Volatility

A European energy trade body has asked governments and financial institutions such as central banks for emergency liquidity to help energy markets cope with the extreme volatility caused by Russia’s invasion of Ukraine.

With sharp market swings and energy and commodity prices soaring since the conflict started, cash available to oil and gas companies is drying up, leaving them at risk of default or unable to hedge their physical trades if they cannot meet margin calls in time.

Margin calls arise when the gap between “spot” power prices and the level at which utilities have sold their output on a forward basis becomes too wide, forcing them to present more collateral as proof that they can deliver in the unlikely event of default, Reuters reported.

“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,” The European Federation of Energy Traders (EEFT) said in a letter.

“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,” it said.

It said any public entities with high credit rating could be potential sources of liquidity, including governments, national central banks or institutions such as the European Central Bank and European Investment Bank.

The federation, which groups some of Europe’s top energy traders, said companies have no choice but to hedge otherwise it would leave them exposed to market price risks.

It warned that one significant market participant’s default could create a “domino effect” leading to the default of the clearing house itself.

“This risk will be exacerbated if governments in Europe and/or elsewhere in the world impose further restrictions on Russian gas, oil and coal imports as this would cause further dramatic increases in energy prices,” it said.

Among EEFT’s members are major oil, gas and energy companies, such Exxon Mobil, BP, Shell, Cheniere, EDF, banks, including Citi Group and Morgan Stanley, and the world’s leading energy traders Vitol, Trafigura, Mercuria and Gunvor.