There’s also the fear of what might come next. Each ebb and flow of the war in Ukraine, each time an extension of the sanctions is canvassed and each time there are negotiations between Ukraine and Russia generates volatility and risk. A cargo of oil might have one value when it leaves a port and a very different one at its destination.

Commodity markets generally and the oil market in particular are being stressed by the fallout from the confluence of volatility-inducing influences.

European commodity traders have pleaded with governments and central banks for financial assistance to avert a financial crisis that could impact the ability of the energy markets to function.

The traders are experiencing a liquidity crisis due to a reduced ability to finance what are essentially margin calls in both the physical market for oil and the derivatives markets.

The traders used bank funding to finance the cargoes of oil and other commodities they ship around the world. As commodity prices have surged since the invasion the funding requirement for each shipment has risen sharply and the costs of hedging the value of the cargoes against risk in financial markets have increased dramatically.

Traders taking out futures contracts to hedge against movements in commodity prices put down some cash upfront and then can be hit with daily margin calls if their positions are losing value.

With the increased volatility, commodity exchanges have increased both the amount of the initial cash required and the secondary margin calls even as banks are either increasing the costs or decreasing their funding for margins calls because of the extreme volatility.

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With the overall cost of hedging soaring as a proportion of the value of the physical cargoes – there are reports that it has amounted to as much as 75 per cent of their value -- it isn’t surprising that the big traders are under financial pressure, nor that futures market activity has diminished significantly.

The position of the traders and oil producers isn’t helped by the fact that the futures market for oil is in “backwardation” -- the expected price of oil in future is lower than the current price. That presumably reflects either an expectation that supply will increase significantly, demand will fall significantly or a combination of both.

With the Americans trying to do a deal with Iran and Venezuela to boost their production in return for sanctions relief and putting pressure on a so-far obdurate Saudi Arabia to draw on its not fully-utilised production capacity a boost to supply is possible, albeit unlikely in the near term.

Each ebb and flow of the war in Ukraine, each time an extension of the sanctions is canvassed and each time there are negotiations between Ukraine and Russia generates volatility and risk. A cargo of oil might have one value when it leaves a port and a very different one at its destination.

The backwardation of the price curve, however, also means that investment in new production, particularly in higher-cost production, will be deterred.

The impact of petrol price rises on demand might be more immediate.

The International Energy Agency said recently that decisions taken by governments, companies and consumers could cut global demand for oil by up to 2.7 million barrels a day if there were an “emergency” response via government regulations and mandates. Some level of demand-side response could be expected even without government interventions.

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In the meantime, with estimates of how much Russian oil is being brought into the market – the US says it may be close to zero while others think that, with the aid of $US20 to $US30 a barrel discounts that have attracted buyers from India and China, its exports volumes may have even increased – the market and the price of oil will remain volatile and risk-laden.

The Europeans are currently discussing whether to include Russian energy in their sanctions (the US and Canada have stopped buying Russian oil), although Germany and Hungary are apparently opposed. Russia supplies the majority of Germany’s oil and gas.

It would require the unlikely approval of all 27 members of the European Union to sanction Russia’s energy exports.

If that were to occur, the price would soar again and it would be probable that the global economy would be plunged into a deep and protracted recession, if it doesn’t face one already, along with an even deeper crisis within the layers of finance that underpin commodity markets.

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