The world’s largest independent oil trader has urged regulators to uphold the “integrity” of the financial markets that underpin trading in global commodities.
In its annual earnings statement, Vitol said policymakers needed to consider “market integrity and liquidity” on futures exchanges used by the industry to manage price risk.
“Over the past year, the gas and power markets have seen unprecedented levels of volatility, testing the resilience of the markets and their participants,” the privately held company said. “For us, this period underscores the need for regulators to consider market integrity and liquidity in times of severe stress.”
Vitol’s comments reflect concerns among commodity traders, who have faced tremendous demand for cash to cover hedging positions.
This month, Europe’s biggest energy traders asked governments and central banks for “emergency assistance” to avert a potential liquidity crisis as sharp price moves sparked by Russia’s invasion of Ukraine weighed on markets.
In a letter submitted to the Financial Times last week, the European Federation of Energy Traders – a trade body which includes commodities traders Vitol, Trafigura and oil majors BP and Shell among its members – said the industry needed “temporary emergency Liquidity support to ensure that the wholesale gas and electricity markets continued to function”.
The volatility in commodity markets since the invasion of Ukraine has been sharpest for nickel, a major Russian export; Oil and gas prices, in which Russia plays a central role, have also skyrocketed since the war began.
Exchanges play an important role in global commodity markets by providing futures contracts to trading houses to manage risk. Without these tools, most traders would not be able to move physical commodities.
That makes margin requirements — or calls for more cash — and clearing limits on commodity futures key drivers of global oil and gas flows.
In its annual report released Wednesday, Glencore, one of the world’s largest commodity traders, highlighted the “ability to fund margin payments” as one of the risks to the industry.
Demand for additional cash to cover short hedging positions surged in early March as commodity prices escalated following Moscow’s invasion of Ukraine and forced some traders to liquidate positions.
The lack of hedging activity is already being felt in the futures markets. Combined open interest — the number of futures that have not been closed or delivered — in major crude oil and refined product contracts has hit its lowest level in seven years.
A measure of liquidity in Brent, the international oil marker tracked by traders, has also fallen to levels not seen in many years, adding to volatility.
In its earnings statement, Vitol said it traded 7.6 million barrels of oil per day in the year ended December, while revenue rose 50 percent to nearly $280 billion.
No earnings numbers were announced, but last year rival retailers Trafigura and Glencore made record profits as they benefited from supply disruptions and rising demand as lockdown measures eased.
Vitol also increased trading in liquefied natural gas to 12.9 million tons, while electricity and gas volumes rose 30 percent.
“The energy markets have reacted to political events with short-term volatility. In the longer term, trade flows will adjust, but prices are likely to remain elevated for some time,” said Russell Hardy, Vitol Chief Executive.
Brent crude was trading 6 percent higher at $114.5 a barrel on Monday. It closed near $130 earlier this month as traders scanned the market for alternatives to Russian oil.
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