Oil traders: central bank support could forestall Lehman moment

Central banks are by definition lenders of last resort. At first blush, oil traders appear optimistic in asking for help from this source. The health of globe-trotting, private sector businesses such as Vitol and Glencore is not generally seen as crucial to financial stability.

But these are exceptional times. Up to a tenth of world oil is out of circulation due to Russia’s invasion of Ukraine. Energy prices are spiralling. Margin calls are hurting. Hedges may exceed the cost of the physical cargos they are designed to protect.

Gas futures linked to Dutch TTF, Europe’s wholesale gas price, are up as much as six-fold. Initial margins — once just a few percentage points of the underlying instrument — have spiralled as high as 80 per cent, traders say.

One trader, used to margin calls or reductions of €50mn during normal volatility, is now looking at ten times that within a single day. Nervy clearing house members are applying additional multipliers.

Add in evaporating liquidity in futures markets and it is clear that the industry is struggling. Free market solutions — trading physical goods without hedges or shunting fewer barrels around the globe — may have uncomfortable consequence for nation states.

The disruption created by margin calls has been highlighted by the struggle of the London Metal Exchange to reopen trading in nickel after failed bets left a Chinese tycoon facing huge losses.

If peace talks fail, central bank support might be desirable. This is unlikely to leave a flood of red ink in its wake. Oil traders have a racy reputation and a patchy record. But they should generally have physical cargos with which to repay loans.

Financial risk aversion is applying a chokehold to oil supply chains that are already severely disrupted. This hardly benefits democracies intent on squeezing Russia via sanctions while improving energy security.

Consolidation in the sector should make support easier to provide. It also increases the vulnerability of the system to the weakness of individual businesses. This year’s turnover at Trafigura, one of the biggest oil traders, is likely to exceed last year’s total of $231.3bn.

The industry’s call for support appears to be a throat-clearing exercise, rather than a desperate plea for help. But given the potential of left-field financial shocks to derail crucial industries, central banks should listen all the same. Remember Lehman Brothers.

The Lex team is interested in hearing more from readers. Should central banks stand ready to support oil traders? Tell us what you think in the comments section below.