There is also the fear of what might happen next. Each ebb and flow of the war in Ukraine, each time an extension of sanctions is sought and each time there are negotiations between Ukraine and Russia generates volatility and risk. A cargo of oil can have one value when it leaves a port and a very different value at its destination.

Commodity markets in general and the oil market in particular are stressed by the fallout from the confluence of volatility-inducing influences.

European commodity traders have pleaded with governments and central banks for financial help to avert a financial crisis that could impact the ability of energy markets to function.

Traders are experiencing a liquidity crunch due to a reduced ability to fund what are essentially margin calls in both the physical oil market and the derivatives markets.

Traders used bank financing to fund the shipments of oil and other commodities they ship around the world. As commodity prices have surged since the invasion, the financing requirements for each shipment have risen sharply, and the costs of hedging the value of cargoes against risks in the financial markets have risen dramatically.

Traders who enter into futures contracts to hedge against commodity price fluctuations deposit cash in advance and can then be hit with daily margin calls if their positions lose value.

With the increased volatility, commodity exchanges have increased both the amount of initial liquidity required and secondary margin calls, even as banks increase costs or decrease their funding for margin calls due to the extreme volatility.

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With the overall cost of hedging skyrocketing in proportion to the value of physical shipments – reportedly it has accounted for as much as 75% of their value – it is no surprise that large traders are under financial pressure , nor that activity on the futures markets has significantly decreased.

The position of oil traders and producers is not helped by the fact that the oil futures market is in a “stall” – the expected price of oil in the future is lower than the current price. This likely reflects either an expectation that supply will increase significantly, demand will decrease significantly, or a combination of both.

As the Americans try to strike a deal with Iran and Venezuela to boost production in return for sanctions relief and pressure a hitherto stubborn Saudi Arabia to dip into its production capacity no fully utilized, an increase in supply is possible, although unlikely in the short term.

Each ebb and flow of the war in Ukraine, each time an extension of sanctions is sought and each time there are negotiations between Ukraine and Russia generates volatility and risk. A cargo of oil can have one value when it leaves a port and a very different value at its destination.

However, the shift in the price curve also means that investment in new generation, especially higher cost generation, will be discouraged.

The impact of rising gasoline prices on demand could be more immediate.

The International Energy Agency recently said that decisions made by governments, businesses and consumers could reduce global oil demand by up to 2.7 million barrels per day if there is a response.” of emergency” via government regulations and mandates. Some level of demand side response could be expected even without government interventions.

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In the meantime, with estimates of the amount of Russian oil entering the market – the United States says it could be close to zero while others believe that with the help of $20 to $30 per barrel, discounts have attracted Indian buyers. and China, its export volumes may even have increased – the oil market and price will remain volatile and risk-laden.

The Europeans are currently discussing whether to include Russian energy in their sanctions (the United States and Canada have stopped buying Russian oil), although Germany and Hungary apparently oppose it. Russia supplies the majority of Germany’s oil and gas.

It would take the unlikely approval of the 27 members of the European Union to sanction Russia’s energy exports.

If this were to happen, the price would skyrocket again and it would be likely that the world economy would be plunged into a deep and prolonged recession, if it is not already facing one, accompanied by an even deeper crisis in the within the layers of finance. that underpin commodity markets.

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