February 23, 2024

Increasing Liquidity Crisis Hits Commodity Markets

Commodity markets have been contending with a liquidity crisis for several months. The situation has resulted in unstable price values in the raw material market.

Commodity Prices Fluctuate

The heavy fluctuation of the price of most commodities after the war between Russia and Ukraine broke out has continued to disturb the market. The volume of trade in most industrial raw materials has dropped to unprecedented low levels. General interest in the oil sector got to its lowest level last week for the first time since 2015, meanwhile, sugar, aluminum, and natural gas shares maintained their position in the dip.

While the gas and energy markets are getting out of control, their high costs are equally reducing the number of jobs that traders can afford to hold due to high collateral needs. Big investors in the oil sector have removed their bets from raw materials as a hedge against inflation since central banks are increasing interest rates. 

A good number of traders have equally stayed away from the metal exchange in London following the nickel crisis earlier in the year. Against that backdrop, risk has been heavy around the prices of various commodities. The result of the risks has been several high swings every day either it was caused by the COVID surge in China or the policy response of central banks or the war in Eastern Europe. 

OPEC+ to Reduce Oil Production

Marex North America’s lead commodity index trader, Ryan Fitzmaurice, said the mart is stuck in an environment with low conviction as risks lurk around everywhere globally. He said further that it is difficult to be very excited till there is a demonstrated increase in speculative money and open interest.

Pierre Andurand, a manager of oil hedge funds, expressed his frustration over the breakdown of the crude futures trading environment. He mentioned huge price instabilities with no obvious reason. In the same way, the Saudi Minister of Energy, Prince Bin Salman complained about high volatility while he said it was part of the reasons OPEC+ decided to reduce oil production.

The issue in the gas and power sector is like what existed in the oil market when the Russia-Ukraine war started in March. There are estimates that the margin call on energy might reach $1.5 billion this month. It would clean up most of the liquidity available in the industry while lobbyists are advocating for means to reduce trading costs.

However, in other markets such as agricultural produce and copper, the problem is about reduced risk appetite. Big traders are turning their backs on trading commodities especially when top central banks across the globe are embarking on hawkish monetary policies to increase rates like it hasn’t been seen in decades. 

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