Supply shortages and margin calls drive latest surge Supply shortages and margin calls drive latest surge Supply shortages and margin calls drive latest surge

Supply shortages and margin calls drive latest surge

Ole Hansen

Head of Commodity Strategy

Summary:  The decision by West to sanction Russia has generated a great deal of self-sanctioning across markets, and with that we are seeing an increased dislocation between the price of “offline” Russian produced raw materials compared with those sourced from other producers. These developments have taken us to the next and increasingly dangerous phase where sanctions on the world’s single-largest commodity producer may threaten financial stability.


Update: Since publishing this update, the London Metal Exchange in an unprecedented move has decided to cancel all nickel trades carried out today. One entity has control of between 50% and 80% of LME nickel inventories, LME data shows, and the battle between a very big long and multiple large short positions has been brutal. Link to Reuters article here



The turmoil across markets continues following Russia’s unprovoked invasion of Ukraine, not least across the commodity sector where tougher US and European sanctions leading to a great deal of self-sanctioning has increasingly cut off supplies from Russia, thereby impacting several key commodities from gas and oil to several industrial metals and key crops such as wheat. Ukraine, often called the breadbasket of Europe given its extensive fertile lands, which are naturally suited to grain production, has seen is supply chains break down with closed harbors preventing exports of key food commodities such as wheat, barley and corn.

With a great deal of self-sanctioning unfolding we are increasingly seeing Russian produced raw materials being treated as toxic, and not to be touched. The latest example of this was today’s announcement from Shell, that they would stop all spot purchases of Russian crude oil. The decision comes as a response to the uproar that followed the company’s decision last Friday to buy a deeply discounted cargo of Russian crude oil.

As a result of these developments the price gains across individual commodities have become very extreme as per the below table.

The decision by West to sanction Russia has generated a great deal of self-sanctioning in markets such as gas and oil that was not covered by the announced sanctions, and with that we are seeing an increased dislocation between the price of “offline” Russian produced raw materials compared with those sourced from other producers. These developments have taken us to the next and increasingly dangerous phase where sanctions on the world’s single-largest commodity producer may threaten financial stability.

As Zoltan Pozsar in a recent update from Credit Suisse puts it “The aggressor in the geopolitical arena is being punished by sanctions, and sanctions-driven commodity price moves threaten financial stability in the West. Is there enough collateral for margin? Is there enough credit for margin? What happens to commodities futures exchanges if players fail?”.

This is the phase we have now entered and whether you are long Russian or non-Russian commodities, any short futures position held against these will require the ability to post margin to cover your exposure. Commodities tend to trade relatively calm with price swings being determined by the supply and demand outlook as well as speculative interest across individual commodities.

Moves like those we have witness during the past few weeks have upended the markets and suddenly producers who have been hedging, ie selling futures to cover future production of metals, energy and agriculture commodities, have increasingly been caught out with futures exchanges demanding more and more collateral to prevent their short positions from being stopped out.

Slide from our latest daily podcast which can be found by searching for Saxo Market Call

Source: Saxo Group

It is most likely these mechanics that in recent days have seen gas prices in Europe at one point hitting a price of $630 per barrel of crude oil equivalent, nickel seeing a four-fold increased to $101,000 per tons before trading was suspended on the London Metal Exchange and five days in a row with limit up conditions in CBOT wheat.

In other words, these dramatic movements are unlikely to be driven by speculators but instead market insiders who have tried to managed their revenues through the use of futures to offset price movements and lock in gains on future production. Other’s as in the case with nickel may have bought nickel from a Russian company and subsequently hedge the price risk via futures. Not only are they now stuck with an extraordinary margin call but may also not receive the physical metal that triggered the selling in the first place.

All in all a situation, as Zoltan mentioned, that could threaten financial stability in the West. We are already seeing headlines about major losses due to margin calls at otherwise very profitable companies, and it is a situation that until resolved will continue to keep across market volatility very elevated.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.