The world’s largest commodity markets begin to seize up


(Bloomberg) – It’s getting harder and harder to trade some of the world’s most important commodities as everything from geopolitical unrest to currency issues has traders scrambling for the exits, quickly depleting liquidity.

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Prices for materials like crude, gas, wheat and metals have become alarmingly erratic as a chasm emerges between buyers and sellers who face great funding strains. Markets were troubled by fears that Russia’s invasion of Ukraine would limit commodity flows, although in many cases rallies were quickly followed by falling prices.

The embarrassing one-week suspension of nickel trading by the London Metal Exchange is an example of a market coming to a halt after extreme price movements. Liquidity is non-existent as some dealers attempt to close positions amid a glitchy reopening of trade in the critical metal.

Volatility is particularly difficult to manage as some moves appear to defy fundamentals, with hedge funds exiting long-term bullish bets as supply looks the tightest in years. Traders find it harder to source cheap cargo due to huge margin calls and credit line caps.

“Volatility as an asset class is huge now, and on top of that you have serious operational issues,” said Ilia Bouchouev, partner at Pentathlon Investments and adjunct professor at New York University. “It’s a vicious loop where volatility forces companies to reduce positions, meaning what’s left in the market is a forced trade. This in turn contributes to even more volatility.

Chaos of metals

The turmoil of war in Ukraine has been compounded by a historic shortage of nickel. The LME suspended trading as prices jumped 250% to a record high, reversing nearly $4 billion in trades.

It caused an uproar among investors who were taking advantage of bullish bets ahead of last week’s close – and the hiccups at the reopening did little to improve the mood. Many previously optimistic investors are now in a long queue of sellers taking steep price drops waiting for buyers.

As of Thursday night, nearly $3.3 billion worth of nickel was on offer at the limit price, but there was not a single bid in the LME’s order book. Only two transactions took place that day on the electronic market. Illiquidity is a concern for consumers who use nickel in stainless steel and electric vehicle batteries.

There are signs of contagion as trade in other metals also collapses. This is bad news for manufacturers and end users, as it could expose them to more violent price swings.

There are signs of spillover into the specialized instruments that LME traders use to manage price risk. Three longtime participants in the options market said it had become much more difficult to get quotes from dealers in recent days and trading spreads between contracts were increasingly erratic.

In aluminum, dealers say the scarcity of cash is triggering wild price moves between key contracts, such as the cash-to-three-month spread. For that spread, which was around $17 on Thursday, bids and offers are now frequently separated by hundreds of dollars.

Traders say the spread is due to electronic bids that were likely placed by algorithmic traders, as in practice the spread is not expected to reach such extreme levels. But with low liquidity and many specialty traders and hedge funds pulling back, these low orders are often the only ones to show up on screen.

Raw chaos

There are clear signs that traders are pulling back. Combined open interest on major crude and refined product contracts hit their lowest level since 2015. Nearly one billion barrels of contracts were liquidated in a period that saw Brent record 16 intraday swings consecutive $5 a barrel — its longest such stretch on record.

“When prices can move $10 a barrel back and forth three times a day, no one can store risk overnight and market makers disappear,” Energy Aspects analysts including Amrita Sen said. .

Clearinghouses raised initial margins – collateral traders set up to fund their positions. In the case of diesel, this meant traders had to hoard almost twice as much money to trade the same amount.

Traders said they were reducing their positions and not holding them as long due to volatility.

gas tumult

One day this month, European benchmark gas traded in a range of 140 euros ($155) per megawatt hour, more than the current cost of the contract. With the swings scaring traders, open interest is near a two-year low.

Even before the Ukrainian war, European gas and electricity markets were extremely turbulent due to concerns about a winter supply shortage. Soaring costs forced German energy giant Uniper SE to borrow $11 billion to repay margin calls. The German electrician Steag GbmH and the Norwegian Statkraft AS also had to increase their liquidities.

Soaring gas prices “require significant liquidity”, said Alfred Stern, who heads Austrian oil and gas company OMV AG. “So far we’ve managed to manage that in a fairly good way, but it’s been significant over the last two weeks here, let’s say in the triple-digit millions we’ve had to inject.”

Crop trade

Chicago wheat volumes soared at the start of the war in Ukraine as prices hit a record high but fell this week. In Kansas City, wheat — the closest type to what Russia grows — open interest hit its lowest level since 2015.

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