Analysis: As liquidity evaporates, oil braces for brutal volatility

A model of 3D-printed oil barrels is seen in front of the falling stock market chart in this illustration taken December 1, 2021. REUTERS/Dado Ruvic/Illustration

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LONDON, March 16 (Reuters) – A rise and fall in oil prices of $40 a barrel in March sent many investors out of the volatile market and set the conditions for wilder price swings in the weeks to come. , said traders, bankers and analysts.

The Russian invasion of Ukraine has pushed the prices of many commodities to unprecedented levels, stretching the finances of companies around the world that trade, process and consume raw materials. They had to borrow more from banks to finance their purchases and to meet cash requirements for futures contracts and derivative positions.

The intraday volatility of some commodities has also increased. Brent volatility is close to 80%, a level not seen since May 2020, and heating oil is around 120%, driven by headlines ranging from peace talks between Moscow and kyiv to new sanctions on the Russia.

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The risk that comes with sharp moves has overwhelmed many traders and investors who have been forced to reduce their exposure by trading fewer commodities or cutting open interest in the derivatives market.

“Open interest crashed. The volatility was too much to bear,” a paper trader at a major trading firm said on condition of anonymity.

Open interest indicates the number of active contracts, and this figure decreases when traders close more positions than are open in a day.

“Open interest cuts reduce market liquidity, worsening volatility,” the International Energy Agency (IEA), the West’s energy watchdog, said on Wednesday.

Traders have also increasingly turned to options as these contracts protect against extreme losses, but this has only added to the volatility. Read more

The IEA said the number of open positions fell on all oil futures contracts on NYMEX and ICE to levels last seen in early 2015 at the bottom of the commodity markets crash. JP Morgan said open interest in commodities fell the most in 14 years by $71 billion last week, led by the energy market.

“The extreme volatility will continue. Volumes are not particularly high, so market reaction to new developments is violent in a relatively illiquid market,” said Tamas Varga of PVM Oil Associates.

Reuters Charts
Reuters Charts


To some extent, traders thrive in volatile markets. However, extreme volatility can bankrupt a player caught on the wrong end of a trade.

The London Metal Exchange suspended nickel trading for the first time last week as traders struggled to meet margin calls. Chinese producer Tsingshan faces billions in losses. Read more

On Wednesday, the European Energy Traders Federation (EEFT), which includes leading oil majors and traders, called on governments and central banks to provide emergency aid to avert a liquidity crunch. Read more

Trading house Trafigura raised new funds from banks this month to cope with rising commodity prices. Read More He also asked private equity firms to seek additional cash for margin calls, Bloomberg reported.

Margin calls have run into the billions across all commodities since Russia began its invasion of Ukraine on February 24.

Initial margin is collateral, or cash, posted by clearing members with the clearing house to cover potential losses in the event of a clearing member default.

Margin calls occur when the gap between the current spot price and the future sale becomes too large, forcing traders to increase the deposit they hold to exchanges on each trade, typically 10% to 15% of the value of the trades. contractual exchanges as proof that they can deliver.

Exchanges have raised margin requirements for European gas, Brent oil futures, Black Sea wheat and corn.

EFET said one of its energy-producing members posted an initial margin of €1 billion ($1.10 billion) in mid-2021 on natural gas futures. This month, the same position needed 6 billion euros ($6.63 billion) to back it up.


The overall cost of maintaining merchants’ core business has increased.

Moving a million barrels of oil costs twice as much as it did in mid-2021. Oil and wheat futures hit highs in March not seen since the 2008 economic crisis.

A senior banking source, asking not to be named, said that even before the invasion of Ukraine, trading companies had to miss out on potential opportunities due to tight liquidity.

Traders are looking at expensive alternative lenders, such as private funds, for more funding, said John MacNamara of consultancy Carshalton Commodities. Private funds will charge about twice the interest of commercial banks.

A trader at a mid-sized energy company said the company was forced to tap alternative lenders earlier this month to cover urgent oil margin calls.

“I have to settle my invoice in due time before I get the money on my physical cargo,” the trader said. “We need to reduce our workforce accordingly to make sure we don’t run out of cash.”

($1 = 0.9064 euros)

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Reporting by Julia Payne; edited by Barbara Lewis

Our standards: The Thomson Reuters Trust Principles.

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