Liquidity is key when energy prices soar
As energy prices reached decade-high levels during 2021, market participants experienced unprecedented pressure on liquidity. Here, Head of Treasury Helle Fiskbæk Andreasen outlines how Danske Commodities benefits from Equinor’s financial strength in markets with significant volatility.
In Q4 2021, liquidity came under immense pressure from rapidly increasing energy prices and extreme daily price fluctuations across markets and commodities. To keep the trading engine running without limiting trading strategies, our Treasury team had to increase liquidity and quickly move significant funds from our accounts to clearing banks and counterparties as security.
Equinor as a catalyst for strong performance
During these extreme market conditions, we benefitted greatly from being part of energy major Equinor. When Equinor acquired Danske Commodities in 2019, one of the main arguments for the acquisition was the ability to combine the agile trading engine and vast market presence of Danske Commodities with Equinor’s financial muscle. During 2021, we clearly saw the value of these complementary strengths.
Danske Commodities’ first response to the increasing prices in the beginning of October was to launch a range of initiatives such as rearranging guarantees to optimally support daily clearing requests, raise parent company guarantees, increase guarantee lines with our banks and ensure optimal use of existing trading lines. However, it soon became clear that we were in a situation unlike anything we had experienced before and over the following months, we extended our credit facility with Equinor to a total of EUR 2.4 billion.
Prepared for high volatility scenarios
In markets with extreme volatility, especially the variation margin will put pressure on a company’s liquidity. When trading bilaterally or through an exchange, a company may need to provide security for any price fluctuations that may arise during the period from the time an agreement is signed until the deal is executed – in case the deal falls through. With high fluctuations, the sum needed to provide security naturally also increases substantially. High volatility also meant that it was difficult to optimise liquidity, as large sums were transferred back and forth to clearing banks due to the margin requirements.
Following a year that has firmly underlined the rationale behind Danske Commodities becoming part of Equinor, we have now fully become part of Equinor’s cash pool, making it easier to transfer money back and forth between the two companies. This makes us even more prepared for big within-day liquidity swings.
About Helle Fiskbæk Andreasen
- Position: Head of Treasury
- Employed since: May 2017
- Educational background: Master’s in Economics