Julia Payne

LONDON, (Reuters) – A rise of $40 per barrel in crude oil prices and a fall in them in March prompted many investors to leave volatile trading and set the stage for wild swings in future weeks, analysts, traders and bankers said.

Russian aggression in Ukraine has caused many commodities prices to soar, putting pressure on companies around the world that process or trade raw materials. To finance the purchase of raw materials and meet their cash needs for futures or derivatives, they had to borrow additional money from banks.

The intraday volatility of some commodities also increased. Brent volatility has risen to close to 80%. This is a new high since May 2020. It is currently at 120%. The rise is due to headlines that range from talks between Moscow, Kiev, or further sanctions against Russia.

Sharp movements have posed a risk to investors and traders alike. They were forced to trade fewer commodities and reduce open interest in the derivatives marketplace.

“Open interest collapsed. “The volatility was too difficult to stomach,” said a paper trader in a major trading company, speaking on condition of anonymity.

Open interest is the amount of open contracts. It falls when trader closes more positions in a given day.

According to the International Energy Agency, the West’s energy watchdog, “The reductions in open interest decrease market liquidity, aggravating volatilities,” they said Wednesday.

These options protect traders from extreme losses but have only increased the volatility.

According to the IEA the total number of oil futures positions on NYMEX (NYSE:) has decreased by a significant amount, compared with levels seen at the bottom in 2015. JP Morgan stated that commodities open interest fell by $71 billion over the week ended, the largest drop in 14 years. It was led by the energy markets.

“Extreme volatilities will not abate. “Extreme volatility will continue because volumes aren’t very high,” stated Tamas Varga of PVM Oil Associate.

Graphic: open interest falls- https://graphics.reuters.com/UKRAINE-CRISIS/byprjegaape/chart.png

Graphic: Brent oil options jump- https://graphics.reuters.com/UKRAINE-CRISIS/lbvgnzqrdpq/chart.png

MARGIN CALLS

Volatility is a good thing for traders. Extreme volatility could bankrupt traders caught on the wrong side or a trade.

Last week, the London Metals Exchange stopped nickel trading. This was because traders were unable to pay margin calls. Tsingshan, a Chinese producer, is facing billions of dollars in losses.

On Wednesday, European Federation of Energy Traders (EEFT), an association of oil majors and traders, called for emergency assistance from central and state banks in order to prevent a cash crisis.

Trafigura, a trading company, raised additional funds from banks to cope with an increase in commodity prices. Bloomberg reported that the company also talked to private equity companies to raise additional capital for margin calls.

Since the invasion of Ukraine by Russia on February 24, 2015, margin calls across all commodities have reached billions of dollars.

To cover any losses that may result from a clearing member’s default, initial margin is collateral or cash posted to clearing houses by clearing members.

Margin calls are when there is too much gap between current spot prices and future sales. This forces traders to raise their deposit at exchanges for each trade. Typically, 10%-15% of contract value serves as evidence that they can deliver.

For European gas futures and Brent oil futures, Black Sea Wheat futures, and corn futures, the margin requirements have been raised by the exchanges.

EFET stated that in the middle of 2021, one of its members was able to post a first margin of 1 Billion Euros ($1.10 Billon). To support the position, 6 billion euros (6.63 billion) was required. TIGHT SYSTEM Increased costs for core businesses have pushed up the cost of trading.

It costs twice as much to move a million barrels worth of oil than in the mid-2021. The March highs for oil and wheat were not reached since the 2008 financial crisis.

Unnamed senior bank source said that trading companies were being prevented from taking advantage of potential opportunities due to tight liquidity even before the invasion.

John MacNamara, a consultant Carshalton Commodities, stated that traders are looking at expensive alternatives lenders such as private money for additional financing. Private funds charge twice the interest as commercial banks. A trader for a small energy company stated that they had to call alternative lenders in order to meet urgent oil margins needs. According to the trader, “I must settle my futures bills before I can get the money for my physical cargo.” We need to scale down accordingly in order to keep our cash supply.

($1 = 0.9064 euros)