The higher price of crude oil is beginning to limit physical liquidity. Why? Credit. As prices rise, the cost of credit gets higher and higher and that at a time when banks are reluctant to extend credit. Increasingly, physical traders will be sidelined by these prices and the resulting credit issues.

SemGroup, a US physical trader, is one that has already fallen foul of this issue as you can read in the story below from the FT....

Oil trading company files for bankruptcy

By Javier Blas in London

Published: July 23 2008 03:00 | Last updated: July 23 2008 03:00

SemGroup, the US physical oil trader, yesterday filed for bankruptcy as it acknowledged losses of more than $3.2bn in different energy markets after betting this year that crude oil prices would fall. Its collapse came as oil prices plunged to their lowest levels since early June. West Texas Intermediate crude oil fell to an intraday low of $125.63 a barrel, down $5 on the day.

Traders sold oil futures as news emerged that tropical storm Dolly was set to miss oil and natural gas installations in the US Gulf of Mexico. Signs of slower oil demand in the US during the summer season also contributed to the sell-off, analysts said. Nauman Barakat, of Macquarie in New York, said: "Overall my bias remains to the downside and I still would like to sell rallies rather than buy dips."
Traders said SemGroup could have exacerbated the spike in oil prices this month, when the market experienced unprecedented swings of more than $10 in a day, as the company was buying back its previous bets on lower prices.

The bankruptcy of SemGroup, which describes itself as the 14th-largest US private held company, affects approximately $3.1bn of debt, according to court filings. BP, the oil company, is the largest creditor, with almost $160m.
SemGroup bet in the futures market that prices would fall as a way to hedge its positions in the physical market. But as oil prices jumped this month to a record of $147.27 a barrel from less than $100 a barrel at the beginning of the year, the mounting losses triggered large margin calls from banks - a request to put up more collateral - draining the company's cash reserves.

The company said in a court filing that it had lost $2.4bn in oil hedges at the New York Mercantile Exchange and another $850m in over-the-counter energy markets.
The credit crunch has exacerbated energy traders' battle with margin calls as commercial and investment banks are reluctant to extend their credit lines to cover margins calls amid volatile markets.

SemGroup's publicly traded subsidiary, SemGroup Energy Partners, which is not part of the bankruptcy, yesterday rose 10.9 per cent on Nasdaq as it said it would be able to carry on its business in spite of the collapse of its parent.
SemGroup Energy Partners shares had lost more than 70 per cent in the three previous trading days.

Kevin Foxx, chief executive of SemGroup Energy Partners, told investors and bankers in a conference call that the company had "a strong future as an independent energy transportation" business.

SemGroup did not return calls seeking comment.

Additional reporting by Chris Flood in London and Sheila McNulty in Houston

Copyright The Financial Times Limited 2008