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Volatility in Commodities Market Cause Spillover Concerns!

08 August 20225 mins read by Angel One
Volatility in Commodities Market Cause Spillover Concerns!
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The commodities market has seen a wild swing in the oil, metal and other raw material prices. This volatility of commodity prices has the potential to spill over the broader market. These swings on Tuesday saw more margin calls generated by the trading firm, which comes as a consequence of Russia’s invasion of Ukraine.

Impact on Metal and Oil Prices

As the invasion began, a massive 30% increase in the prices of Brent Crude was noticed. Furthermore, nickel prices doubled up on Tuesday, 8 March 2022. An increase in the metal price comes as a result of the move made by a Chinese firm to cover its bets and curb exposure of costly margin calls.

Margin Calls on Commodities Market

The commodities market has seen a volatile price spike following the Russian invasion. To maintain liquidity in the market, International Exchange Inc. saw margin calls made at the clearinghouse as the Chief Financial Officer of the exchange operator stated on Tuesday, 8 March 2022. Further at Raymond James’s investors’ conference, ICE CFO Warren Gardiner said that every margin call was fulfilled within an hour.

More About the Margin Calls

These increased margin calls are basically the essential requests made to provide the broker with extra funds. This scenario arose after the sanctions made by the United States and its allies on Russia, the giant commodity exporter. The effects are far-reaching as the raw material prices have spiked with supercharged volatility amid the war situation. Moreover, metals like gold and palladium, wheat and other ranges of commodities have also recorded significant hikes in their prices in recent weeks.

Margin Calls on Metal Prices

In some cases, the trading markets that are already chaotic have been exaggerated by the margin calls. The Tsingshan Holding Group of China bought huge amounts of nickel in an attempt to reduce the short bets on metal. This costly margin call overshoot the nickel to double its price in a few hours, which was recorded to be above $ 1,00,000 per tonne on Tuesday. This impacted the LME (London Metal Exchange) heavily as they had to halt trading.

Steps Taken to Curb Costly Margin Calls

To satisfy the coal hedge contracts margin requirements, an additional $ 534 million was posted since December end, as stated by Peabody Energy on Monday. Further, the company with Goldman Sachs entered a credit facility worth $ 150 million. This action will support and meet the requirements of near-term liquidity. Furthermore, they also plan to sell shares worth $ 225 million to repay the debt.

Final Thought

A professor of finance at the University of Houston stated that the commodity industry of all sectors had been hit by the unprecedented shock simultaneously. Still, the stress has been absorbed by the system but remains a cause of concern. Further, one can imagine that this current volatile hike can gradually change and have a broader systemic effect, according to the futures market expert Craig Pirrong.

Thus, with Russia invading Ukraine, the prices of oil, metal, raw materials, and other commodities have shown high volatile hikes. Only time will tell if it spills over to other broader markets or not, which is a matter of concern for the market experts.

Source: Economic Times

Frequently Asked Questions

  1. Why are metal stocks going up?

Due to Russia’s move to stop export commodities, the world faces a low production and high demands of metals, which has shot up the metal index.

  1. Why are oil prices hiking?

The geopolitical trouble between Russia and Ukraine has seen various sanctions made on Russia, and in response, Russia has stopped exporting crude oil. This left the oil-producing countries in a spot of worry to meet the demands in time.

  1. Will frequent petrol price hikes affect the Indian economy?

Yes, a frequent increase in the crude oil prices will subsequently shoot up India’s expenditure which will further affect the fiscal deficit (difference between total revenue and total expenditure) of the Indian government.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

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