Oil traders: central bank support could forestall Lehman moment

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