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    Limited US$ 1.5 billion call options put pressure on energy trade

    September 7, 2022 - CE Noticias Financieras


      European energy trading is affected by limited call options of at least US$1.5 trillion, putting pressure on governments to provide more liquidity reserves, according to Norwegian bank Equinor ASA.

      In addition to stoking inflation, the biggest energy crisis in decades is sucking up capital to secure operations amid wild price swings. That is pushing European Union officials to intervene to prevent energy markets from stagnating, while governments across the region are stepping in to support struggling utilities.

      Finland has warned of a "Lehman Brothers" moment, should power companies face a sudden cash shortage.

      "Liquidity support will be needed," Helge Haugane, senior vice president for gas and power at Equinor, said in an interview. The problem centers on derivatives trading, while the physical market is functioning, he said, adding that the energy company's estimate of US$1.5 billion to prop up so-called paper trading is "conservative."

      Many companies are finding it increasingly difficult to manage limited call options, an additional collateral swap requirement to secure trading positions when prices rise. That's forcing utilities to secure multibillion-euro lines of credit, while rising interest rates drive up costs.

      "This is just capital that is dead and tied up in margin calls," Haugane said in an interview at the Gastech conference held in Milan. "If companies need to bring in so much money, that means liquidity in the market dries up and this is not good for this part of the gas markets."

      So far, Germany has introduced Europe's largest plan to support companies affected by the aftermath of the war in Ukraine by making E7 billion in loans available to companies with liquidity problems.

      German energy giant Uniper SE last week requested an additional E4 billion after fully utilizing a E9 billion facility, while Austria extended a E2 billion credit to cover the commercial positions of Vienna's municipal electricity utility.

      Finland and Sweden announced a $33 billion emergency liquidity facility on Sunday to support utilities through loans and credit guarantees.

      The EU intervention plans would be "sensitive" to derivatives trading, Haugane said. Among the emergency interventions being discussed by the EU are price limits in the power and gas markets. For Equinor, price caps in electricity could make sense, because power markets are more localized.

      But in the gas sector, such measures would be extremely difficult due to the global nature of the market. For example, Europe has to beat Asia on price to attract shipments of liquefied natural gas.

      "Energy is a local market, i.e. domestic, so in this case it would be possible to do something that governments could control," Haugane said. "But the gas price cap issue is different, because the natural gas market is global and therefore not so easy to manage."

      The underlying problem in the gas market is lack of supply, and price caps will not ease the strain or increase reserves, according to the Equinor executive.

      "It doesn't create any solution to the problem," Haugane said. "Gas is a global commodity and we don't have that much supply, so there's not much we can do."

      The European Commission is also examining measures to help with liquidity. These could include European Central Bank credit lines, new products such as margin calls and temporary suspensions of derivatives markets, according to a policy background paper seen by Bloomberg News.


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