Europe Faces Lehman Brothers Moment as Energy Companies Face Daunting Margin Calls - Report

Apart from severe energy crunch, and skyrocketing prices, Europe is bracing for another huge crisis on account of Russia's refusal to restart pumping natural gas on the Nord Stream 1 pipeline.

Major energy companies in the European Union are already facing a liquidity crisis and the situation could worsen to a point that these companies will need significant government support to prevent a collapse of the energy derivatives markets, said in a report.

Oil, Gas and Mineral Reserves in Europe
Oil, Gas and Mineral Reserves in Europe Flickr/ Hugo Ahlenius

Huge Margin Calls

According to Helge Haugane, Equinor's senior vice president for gas and power, energy firms in the region are facing margin calls of a total of $1.5 trillion in the derivatives market. With prices rising and the market remaining volatile, this scenario is termed as the 'Lehman Brothers' moment for the European energy companies.

"If the companies need to put up that much money, that means liquidity in the market dries up and this is not good for this part of the gas markets," Haugane told Bloomberg.

With many companies struggling to meet their margin calls, some European nations have already extended policy support to energy companies. Finland and Sweden are among these countries.

"This has had the ingredients for a kind of a Lehman Brothers of energy industry," Finland's Minister of Economic Affairs, Mika Lintila, said, according to Oilprice. According to the report, Finland is setting up a loan and guarantee scheme of whopping 10 billion euro for some of the companies in the energy sector.

Lehman Brothers Moment

The collapse of Lehman Brothers, the global financial giant that provided investment banking, trading, brokerage services, was the defining moment in the 2008 financial crisis. The government's decision to allow Lehman Brothers to fail marked the high point of the crisis that started with the housing market bust and the credit crunch, which eventually took the world down the path of one of the worst recessions in history.

Oil Platform
Oil Platform Wikimedia Commons

Nord Stream 1 Totally Shut

Russia said earlier this week it will resume full gas supplies only when the sanctions against it are lifted by the West. The 1,200km Nord Stream 1 pipeline stretches under the Baltic Sea, connecting the Russian coast near St Petersburg to north-eastern Germany. With gas floes completely shut, Europe is grappling to secure natural gas reserves ahead of the winter.

European gas gas prices have spiked more than 400 percent in Europe after the supply crisis began in the wake of the Ukraine war. Further output cuts or supply outages will drive prices up again.

In another blow to Europe, OPEC+ oil cartel, which is dominated by Russia, has said it will cut oil production by 100,000 barrels a day. The cut will take oil supply levels back to the August levels.