Even though utilities could be making serious money (depending on whether governments are regulating prices and/or putting on caps), the high prices and volatility are driving up the requirements for collateral (cash) the utilities/traders must deposit to hedge their positions, and this is creating a serious liquidity crisis for the utilities.

Many companies are finding it increasingly difficult to manage margin calls, an exchange requirement for extra collateral to guarantee trading positions when prices rise. That’s forcing utilities to secure multi-billion euro credit lines, while rising interest rates add to costs.

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

* Remember, when prices move up, traders like Xiang who have sold futures contracts face margin calls; they must put up more cash to cover potential losses.

A potential mitigation strategy for reducing margin call obligations is keeping the price of commodities floating if possible (both on the purchase as on the sales side). In that case there is no need to hedge the position. ¹⁾