Gunvor, one of the world’s biggest independent energy traders, cut trading positions after the gas price spike triggered margin calls from brokers and exchanges.
The Geneva-based company reduced its exposure as wholesale gas prices surged over the past couple of months because of concerns about tight supplies ahead of the winter, said people with knowledge of the situation.
The company had received about $1bn of margin calls — demands for extra cash to cover its position, the people said. All have been paid, they added, and the company has more than $3bn of excess liquidity to cover its remaining exposure.
The global energy crunch has rippled across the energy supply chain, hitting everyone from domestic consumers to trading houses that move millions of barrels of oil and gas around the world each day.
Other traders have also reduced gas positions or placed limits on new business. Some are seeking to increase their credit lines to protect themselves against any further explosion in prices.
Gunvor said its natural gas and LNG businesses were “substantially profitable, and have remained so during the last months and years”.
“Managing risk and liquidity is what Gunvor and other physical traders do,” it added. “While there have been margin calls associated with the natural gas price rally, Gunvor has the processes and instruments in place to effectively manage this volatility. Every margin call associated with natural gas and LNG made during the last several months has been paid.”
Even before the most recent jump in gas and LNG prices, the company flagged the impact of “market dislocations and volatility”, saying in its half-year results that it had led to a “substantial growth in the derivatives value in the balance sheet”.
The results showed Gunvor had utilised 74 per cent of its $17.8bn of credit facilities at the end of June, up from 50 per cent at the end of December.
“The group quickly adjusted some of its trade finance bilateral lines with its pool of lenders to reflect this higher price environment and ensure sufficient available funding to support its trading operations,” the company said at the time, adding that it had also “refinanced key facilities at higher levels”.
Gunvor has expanded aggressively into natural gas in recent years and is now the biggest independent trader of liquefied natural gas cargoes.
In the first half of the year Gunvor traded 6m tonnes of LNG, up from 5.3m tonnes in the same period a year earlier, and its revenues from trading the commodity more than doubled to $2.5bn.
The price of LNG has soared from about $5 per million British thermal units a year ago to more than $30 today, having briefly spiked higher than $50 last week.
Big commodity traders use derivatives to hedge contracts against price swings and lock-in margins. This typically involves selling futures contracts.
As natural gas prices in Europe and Asia have soared, the losses on these contracts have increased, requiring Gunvor and other traders to make margin payments to brokers and exchanges.
These losses from profitable positions will be offset once the commodities are sold, but in the intervening period margin calls can place strain on commodity traders, which are dependent on short-term credit lines from banks to fund their activities.
“This cash flow mismatch can cause major liquidity problems,” said Craig Pirrong, a finance professor at the University of Houston. “And banks, for various reasons . . . may not be willing to extend credit sufficient to meet these liquidity needs. This would lead firms to have to cut positions. This hurts, but it is not Armageddon.”
A series of commodity trading scandals in Singapore, including the bankruptcy of Hin Leong Trading at the start of the global pandemic, has led to some banks quitting commodity trade finance and others becoming more selective about their lending.
As a result, some banks will now only deal with the biggest traders, a group that includes Gunvor, Vitol, Trafigura, Mercuria and Glencore.
“The steps taken by any trading house — whether it is Gunvor or its competitors — to cut positions and/or seek additional financing support are appropriate, responsible measures taken to respond to market conditions. The notion that these activities directly indicate losses is wrong,” the company said in its statement.
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Source: Financial Times