I watched Margin Call again last night (its on Netflix right now) and slept on the suddenness of the events that unfolded. I’ll share with you some of my thoughts that occurred to me this morning, as I made a comparison of what is going on currently in the commodities complex.
Some crazy stuff has happened in the last two weeks. It is well covered by some of the media, and invisible to other outlets.
If an investor is trading commodities directly (GLD, USO,CPER) and related trades (GDX, XEG.TO, XOP, OIH, COPX) it’s important to know what happened over the last 2 weeks.
Many of the trading houses and physical buyers got squeezed meaningfully as price accelerated faster than normal across the commodity complex. Many of the commodities shot higher in unison, which exacerbated the problem for trading companies involved in more than one commodity. Then the LME,CBOE increased margin requirements meaning these trading firms had to have more collateral due to the volatility.
Nickel
We came close to losing the functionality of the metals exchange due to no offer in Nickel as an example. They closed the nickel market to help them get the margin call money of $8 Billion from one trading house. But they also reversed trades that took place during the sudden spike. I only have a few pieces of information on this, but it was bad enough that the reversal of the trades prevented more traders, market makers and physical buyers from falling into bankruptcy. The flat top shown is while the market was closed for a few days. This doesn’t show the absolute peak at 100,000.
Other metals
We came close to losing a few of the worlds larger /largest trading houses who suddenly saw themselves on the outside of the standard deviations of market movements. Trafigura We also came close to losing some of the physical buyers as they were squeezed and forced to buy as prices soared and have now retreated, meaning they own expensive inventory. Some companies within commodity related trading have applied for emergency funding from central banks and governments. The chart above and the table below are from tradingeconomics.com. Does this give you any comfort, seeing those monthly changes?
Copper
Magically, after the nickel squeeze where there was no offer as price soared 80,000 dollars, other commodities seem to have been ‘managed’ back to where we started before the Russian surge. Whether it was real trades believing the worst is behind us or the invisible hand, it is important to know where we as a world are. By getting back to where we started, perhaps it can allow the world market participants to be acutely aware of the current risk level for trading positions going forward. There may be no offer (Nickel), there may be no bid (Russian oil).
Gold
We are about to see what real world shortages are now that the global order is messed up unless this war situation gets repaired quickly. Even then, local supply is a much bigger deal than even three months ago.
Oil
The largest traded commodity in the world moved almost 50% in 2 weeks. Here is the $WTIC chart, representing crude oil – North America.
Global inventories
Globally the world has been consuming 100 million barrels/day of crude oil. We have been producing 98 million, drawing down inventories each and every week at a global level. With Russian export volumes about to drop down about 3 million barrels /day, the global community is about 5 million barrels a day short each day now.
Here is the global crude inventories chart from the IEA, which I found on twitter. This chart is before the war started.
The Russian 3 million barrels a day adds up to over 1,000,000,000 barrels a year off the market if this continues as an example. As the storage capacity in Russia fills up, they will have to stop producing as much oil as they do.
5 Million barrels a day is a really big shortfall for the world. We already have 40 million barrels not in the market that we expected to be there, in early February. By the end of March, we are 100,000,000 million Russian barrels short of demand or missing an entire day of world consumption. We are about to go through an EPIC energy crunch until they get the Russian oil back on the market. If the Russian sanctions are still in place in June, this will be very ugly. It is widely known that OPEC+ does not have this kind of spare capacity.
This is not a good thing, even for us investing in the market. This is literally a change in survival for low income people that can’t get to work, can’t heat or cool their homes, or afford food as energy takes up dollars out of the paycheque.
Wheat
But then there is the food related problem.
Here’s wheat.
FRANCE’S MACRON: WE WILL HAVE DEEP FOOD CRISIS IN NEXT 12-18 MONTHS IN AFRICA AND MIDEAST DUE TO UKRAINE WAR
Politics in commodities
If Monday / Tuesday scared the crap out of you as a commodity trader, it’s about to get a lot wilder. Anything is possible when individual people get desperate. Add on when governments get desperate to be reelected, and it gets even wilder. Without being political, this chart from the White House shows a few days where gasoline prices didn’t follow crude oil lower. Looking at the crude oil chart and the problems ahead, would you lower the gasoline price anytime soon, expecting it to be an elevator higher? The government propaganda war is always as big as the Ukraine war. When commodities are out of favour, they don’t thank the low prices. When prices increase, they love calling these corporate leaders to the halls of congress as if that changes the tune for commodity prices.
Conclusion
Be very careful as we are about to go through a blender. If we have large positions in commodity related trades, it could be huge risk/ huge reward/huge pain experience. We just watched some of the best traders in the world get swiped. All that to say, there is no exit sign at the top, but it is about to get really ugly.
I graduated from college during Canada’s Government invoking the National Energy Policy in the 1980’s. Within 2 weeks the oil industry was wiped out in Canada. I am one of those that will never forget.
Watching Margin Call this week could not have been more timely. I strongly recommend you understand how fast it all changes at the end.
Good trading,
Greg Schnell, CMT, MFTA