Major gas traders seek cash to cover margin calls

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By Andy Hoffman, Jack Farchy and Stephen Stapczynski on 10/10/2021

(Bloomberg) –Major energy traders including Gunvor Group Ltd. and Mercuria Energy Group Ltd. have reduced the size of their trading positions and increased borrowing from lenders to cover large margin calls stemming from the unprecedented surge in European gas prices, according to people familiar with the matter.

Commodity trading houses have been expanding their natural gas dealings in recent years, signing long-term contracts to purchase volumes of the fuel, and typically building corresponding short positions in derivatives to hedge potential losses from price swings. As the price of gas in Europe has spiked, the traders have been told to deposit additional funds — known as margin calls — with brokers and exchanges to cover part of the value of their positions in gas futures, the people said.

Both Gunvor, the biggest independent trader of liquefied natural gas, and Mercuria, a major power and gas trader, asked banks for additional credit to fund margin calls arising from their hedging positions, said the people, who asked not to be named because the information is private.

Gunvor received margin calls of about $1 billion in total for its gas and LNG trading positions and has paid that out in the last few months, one of the people said. The company has about $3 billion in readily available liquidity to cover obligations, according to the person.

The two trading houses, both headquartered in Geneva, have also reduced their gas-trading positions to help manage the extreme volatility, the people said.

Gunvor and Mercuria declined to comment.

Vitol Group, the biggest independent oil trader, has also increased borrowing because of margin calls but hasn’t been forced to reduce its trading positions, the people said. Vitol declined to comment.

Trafigura Group, the second-biggest independent oil and metals trader, has increased its credit lines by about $6 billion this year amid rising prices for commodities from copper to LNG, but has not significantly reduced its gas trading positions or increased borrowing in response to recent margin calls, another person said.

The margin calls don’t necessarily reflect losses. Even profitable trading positions would need large amounts of additional capital to cover margin calls as prices have surged. The challenges faced by trading houses show how Europe’s unprecedented energy crisis is creating difficulties at every step along the supply chain, not just for end consumers.

Even Russia, the world’s largest gas exporter, has been trying to talk down the market, saying the recent frenzy — in which prices have jumped 60% in two days — is in nobody’s interest.

The crisis sweeping the region, the result of scant supply exhausted by rebounding demand, threatens to hamper the economic recovery by driving up business costs and household bills and sending inflation soaring. Several industries have seen large energy users shutter operations that have become too expensive to run.

With temperatures in northwest Europe forecast to fall below normal next week, combined with expectations for low wind-power output across the region, could boost consumption of gas and stoke further price volatility.

Trading houses rely on short-term borrowing facilities from banks to fund their business of buying, storing, transporting and selling raw materials. Their pool of banks has been shrinking in recent years as one-time major lenders including Dutch bank ABN Amro and BNP Paribas of France exit or pull back from the sector following a series of trading scandals, and losses in Singapore.

Gunvor also issued a $300 million bond last month, returning to corporate debt markets for the first time since 2013.