Home Book trading EXCLUSIVE Commodity Traders Face Large Margin Calls As Gas Prices Soar

EXCLUSIVE Commodity Traders Face Large Margin Calls As Gas Prices Soar

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A gas burner is pictured on a stove in a private home in Bordeaux, France, December 13, 2012. REUTERS / Regis Duvignau

LONDON, Oct. 4 (Reuters) – Brokers and exchanges are asking the world’s largest commodities trading houses to deposit hundreds of millions of dollars in additional funds to cover their exposure to soaring gas prices, said to Reuters seven sources with direct knowledge of the matter. .

Glencore, Gunvor, Trafigura and Vitol are among the commodities traders facing so-called margin calls on their financial positions in natural gas markets, the sources said.

The appeals force traders to tie up more capital. Some, especially small businesses, have to increase their borrowing, leaving them less money to trade and can hurt their profits, the sources said.

The sources, which include company executives, brokers and bankers, declined to be named due to the sensitivity of the matter.

“Although there have been margin calls associated with rising natural gas prices in Europe, Gunvor maintains a healthy liquidity position and instruments to manage any further volatility,” a company spokesperson said. .

Glencore, whose main business is mining, declined to comment. Trafigura and Vitol also declined to comment.

Small Swiss trader Kolmar Group said he was paying large margin calls, but the positions were properly hedged and did not pose a risk to the company. He did not give details. Lebanese firm BB Energy said it had no margin calls.

Trading companies have relied heavily on natural gas produced and exported from the United States in recent years, signing long-term contracts to purchase liquefied natural gas (LNG) cargoes. Some of the contracts run until 2041 and are primarily designed to export gas to Europe and Asia.

A bond prospectus released by Gunvor this week gave rare insight into the size of its hedging operations, largely related to gas and LNG. It showed that the company’s pre-sold or covered inventory stood at $ 5.3 billion in June, up from $ 2.8 billion in 2018. Natural gas and LNG trade accounted for nearly half of it. of its volumes traded over the period, to around 45%.

The prospectus also showed that at least $ 2.5 billion of the company’s credit lines were used for margin call financing, out of a total of its $ 18 billion credit facilities.

LIQUIDITY PRESSURE

To hedge against the price differences between physical gas in the United States today and the rest of the world in the future, traders must sell short positions in the European and Asian gas futures markets.

A short position is created when a trader sells a gas futures contract with the intention of buying it back later, hopefully at a lower price.

The strategy caused a liquidity squeeze last month when European gas prices soared due to various factors including low inventories, high demand for gas in Asia, weak Russian and LNG supply in Europe and breakdowns.

In Europe, the main platform for building a short position in gas futures is the Dutch gas market hub TTF.

Two of the sources said the trading houses and other players together had accumulated $ 30 billion in short positions in the TTF market, with European utilities taking the opposite long side of the coin.

Traders typically borrow to create short positions, with 85-90% of funding coming from banks. About 10-15% of the value of the shorts – known as the minimum margin – is covered by traders’ equity and deposited into a broker’s account.

A margin call occurs if the funds in the account fall below the minimum margin requirement, in this case 10-15%.

With the TTF gas contract for the first month, a European benchmark, which has climbed 385% since January, coverage from 10 to 15% has turned into 3 to 5%, triggering margin calls.

Traders were forced to provide additional funds from their own reserves or bank lines of credit.

The sources said the trading companies had also sought to adjust their books to reduce their exposures.

The situation is particularly difficult for small and medium-sized business enterprises, the sources said, who described the margin calls as on a scale never seen before. Big companies have much deeper pockets. Trafigura’s first-half results in June, for example, showed it had $ 6.8 billion in cash and cash equivalents.

LNG sellers are also placing additional requirements on trading houses, requesting letters of credit to ensure they can pay, industry sources say. Read more

ICE data

Reporting by Julia Payne and Dmitry Zhdannikov, Additional reporting by Marwa Rashad, Susanna Twidale in London and Jessica Jaganathan in Singapore Editing by Simon Webb, Veronica Brown and Mark Potter

Our Standards: Thomson Reuters Trust Principles.


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