Energy Traders Ask For Central Bank Bailouts To Save Them From "Margin Call Doom Loop"

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Yesterday, we reported that the Bloomberg news that one of the world's largest independent energy merchants - the secretive Trafigura which trades hundreds of billion in commodities every year - was facing "margin calls in the billions of dollars" which meant that the commodity "margin call doom loop" idea floated by repo guru Zoltan Pozsar was finally coming true, and despite Barclays' earnest attempts to minimize its impact, could threaten broader financial stability and was manifesting itself in broad liquidity squeezes which could be observed in the surge in such unsecured funding markets as the FRA-OIS.



Well, Zoltan was spot on again, because one day later, on Wednesday morning, the FT reported that Europe’s largest energy traders have joined insolvent bank in calling on governments and central banks to provide “emergency” assistance to avert a cash crunch as sharp price moves triggered by the Ukraine crisis strain commodity markets.

Yes, that's what happens when the "margin call doom loop" goes global.

The FT writes that in a letter it had seen, the European Federation of Energy Traders, a trade body that counts BP, Shell and commodity traders Vitol and the margin-call stricken Trafigura as members, said the industry needed “time-limited emergency liquidity support to ensure that wholesale gas and power markets continued to function”.

“Since the end of February 2022, an already challenging situation has worsened and more [European] energy participants are in [a] position where their ability to source additional liquidity is severely reduced or, in some cases, exhausted,” EFET said in its letter, dated March 8 and sent to market participants and regulators.

It was "not infeasible to foresee . . . generally sound and healthy energy companies . . . unable to access cash", the letter warned, clearly ignoring that "generally sound" companies would have anticipated such a fat tailed scenario. The fact that they didn't suggests that they were either not "generally sound", or "healthy" and certainly did not plan accordingly. And yet somehow their stupidity and/or greed makes them eligible for Fed bailouts?

Rhetorical questions aside, just like that our theory that the recent spike in FRA-OIS was due to funding shortfalls at commodity companies has been proven true.

So what do these "generally sound" energy traders want?

According to the letter, the EFET wants state entities such as the European Investment Bank or central banks, such as the European Central Bank or the Bank of England, to provide support through lenders, to soften the impact of margin calls.