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Commodity traders face high margin demands as gas prices skyrocket

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LONDON – Brokers and exchanges are telling the world’s leading commodities trading houses to deposit hundreds of millions of dollars in additional funds to cover their exposure to high gas prices, seven knowledgeable sources told Reuters. straight out of the matter.

Glencore, Gunvor, Trafigura and Vitol are among commodity traders facing what are known as margin calls on their financial positions in natural gas markets, the sources said.

The calls are forcing traders to tie up more capital. Some, particularly smaller companies, are having to increase indebtedness, leaving them with less cash to trade and potentially hurting their profits, the sources said.

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The sources, which include company officials, brokers and bankers, declined to be named because of the sensitivity of the matter.

“While there have been margin calls associated with the rebound in the price of natural gas in Europe, Gunvor maintains a healthy liquidity position and instruments to manage any additional volatility,” said a company spokesman.

Glencore, Trafigura and Vitol declined to comment.

Commercial companies have invested heavily in natural gas produced and exported from the United States in recent years, signing long-term contracts to buy cargoes of liquefied natural gas (LNG). Some of the contracts run until 2041 and are designed primarily to export gas to Europe and Asia.

A bond prospectus released by Gun earlier this week gave a rare glimpse of the size of its hedging operations, much of it related to gas and LNG. It showed that the company’s pre-sold or hedged inventories totaled $ 5.3 billion in June, up from $ 2.8 billion in 2018. Natural gas and LNG trade accounted for nearly half of its traded volumes for the period at roughly the Four. Five%.

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The prospectus also showed that at least $ 2.5 billion of the company’s credit lines were allocated for margin call financing, out of its total credit lines of $ 18 billion.

FIRE STRATEGY

To hedge against price differences between physical gas in the United States now and the rest of the world in the future, traders must sell short positions in the European and Asian gas futures markets.

A short position is created when a trader sells a gas futures contract with the intention of buying it back later, hopefully at a lower price.

The strategy fell through last month when European gas prices soared due to a variety of factors including low inventories, high demand for gas in Asia, low Russian and LNG supplies to Europe and power outages.

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In Europe, the main platform for building a short position in gas futures is the center of the Dutch TTF gas market.

Two of the sources said that trading houses and other players had together accumulated $ 30 billion in short positions in the TTF market, and that European utilities took the opposite long side of the game.

Traders typically borrow to build short positions, with 85-90% of funding coming from banks. About 10-15% of the value of the short sale, known as the minimum margin, is covered by the traders’ own funds and deposited in a broker’s account.

A margin call occurs if the funds in the account fall below the minimum margin requirement, in this case 10-15%.

With the first month TTF gas contract, a European benchmark, which soared 385% since January, the 10-15% coverage became 3-5%, prompting margin calls.

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Traders were forced to provide additional funds from their own reserves or with lines of credit from banks.

The sources said that commercial firms had also sought to adjust their books to reduce their exposures.

The situation is particularly difficult for small and medium-sized commercial companies, said the sources, who described the margin calls as on a scale never seen before. Larger companies have much deeper pockets. Trafigura’s first half results in June, for example, showed it had $ 6.8 billion in cash and equivalents.

LNG sellers are also placing additional demands on trading houses, requesting letters of credit to make sure they can pay, according to industry sources.

(Reporting by Julia Payne and Dmitry Zhdannikov, Additional reporting by Marwa Rashad, Susanna Twidale in London and Jessica Jaganathan in Singapore Edited by Simon Webb, Veronica Brown and Mark Potter)

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