Goldman Sachs is on track to earn around US$1 billion in commodities trading this quarter following dramatic swings in those markets, sources familiar with the matter say, in what would be its best three-month stretch on commodity markets for more than a decade.
The U.S. bank had already generated about $500 million in commodities revenue before Russia invaded Ukraine in February amid a noticeable increase in client activity, the sources said, and its traders have continued to perform well since then.
JP Morgan and Morgan Stanley are also poised to post strong commodities results, sources said, as corporate treasurers and institutional investors scrambled to position themselves for a spiraling rise in prices. The war in Ukraine has only further convulsed these markets, causing sharp movements in commodities such as crude oil, natural gas, gold, nickel and wheat.
This high level of volatility means that there is still some uncertainty surrounding quarter-end revenue numbers, the sources warned. Spokespeople for Goldman Sachs, JP Morgan and Morgan Stanley declined to comment.
Rising commodity activity should help boost banks’ overall trading earnings in what has been the most volatile period for financial markets since the start of the coronavirus pandemic. Analyst firm Coalition Greenwich expects the top 12 investment banks to report a 7% drop in global markets revenue in the first quarter from a year ago, although that would still represent an increase of more than 35% compared to the first quarter of 2019 (the equivalent pre-pandemic quarter).
“This is a significantly healthier market environment for banks than before the pandemic,” said Michael Turner, head of competitor analysis at Coalition Greenwich. “While there may be losses, the increased volatility means these will be offset by gains on other products. Larger banks with a wide supply should benefit from a portfolio effect.
“expected [an] an uptick on the macro side of the G-10, with banks doing very well in commodities and declines in equities and credit,” he added.
US banks’ commodity trading desks have grown in importance since the start of the pandemic amid heightened volatility in energy and metals markets in particular. Goldman’s senior management highlighted strong performance in commodities trading in seven of the last eight quarterly earnings calls as the bank leveraged its sprawling presence in those markets.
Head of commodities trading Ed Emerson has overseen a broad-based increase in revenue this year in the commodities markets where Goldman is active, sources said.
Oil trading continued to perform well under Xiao Qin and Anthony Dewell, whose teams also saw big gains in 2020 when oil futures prices dipped into negative territory. Brent crude oil futures hit an intraday high of nearly US$140 a barrel on March 7 – their highest level since 2008.
Power and gas, which Nitin Jindal leads in North America, and metals trading have also been strong for the bank, sources said. Prices for various precious and base metals have fallen in recent months, with gold briefly surging above US$2,000 an ounce. Elsewhere, the London Metal Exchange opted to halt nickel trading and cancel trades after prices more than doubled on Tuesday to more than $100,000 a tonne.
Bankers and consultants say more companies were looking to hedge against fluctuating commodity prices even before Russia’s invasion of Ukraine, given the continued rise in the cost of raw materials with which they were already confronted.
“I’ve never talked to so many companies about commodity hedging – even before the conflict in Ukraine started,” said Amol Dhargalkar, global head of companies at consultancy Chatham Financial. “Interest in hedging tends to be highly correlated to the commodity price cycle. As prices rise – whether in metals, energy or agricultural commodities – companies have scrambled to understand the exhibitions across their organizations and supply chains, and sought to have a playbook to put together.”
Executives note that despite the encouraging outlook for banks’ trading revenues in general, there remains considerable uncertainty about the exact numbers. Troy Rohrbaugh, head of global markets at JP Morgan, told an investor conference on Tuesday that the bank was still on track for a 10% drop in trading revenue from a year earlier, but noted that many clients are under “extreme stress” and “which creates potentially very significant exposure to counterparty risk”.
Until the end of February and the conflict in Ukraine, senior bankers had reported a solid trading environment for interest rate and foreign exchange products in particular, as investors reorganized their exposures in anticipation of the decision. of the US Federal Reserve to curb inflation.
This contrasts with what appears to be a more disappointing quarter for transactions. Coalition Greenwich’s Turner said investment banking transaction revenue could fall more than 40% from a year ago in the first quarter, mainly due to a sharp drop in ECM activity and SPAC registrations in particular.
“What’s really going to hurt on the investment banking side is the lack of SPAC,” Turner said.