Macaskill on markets: Commodity spoils of war, without the ESG headaches
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Macaskill on markets: Commodity spoils of war, without the ESG headaches

Energy price volatility driven by war in Ukraine could deliver a windfall to banks such as Goldman Sachs that retain scale in commodity trading. Profits from dealing can also be made without triggering ESG or sanctions-related pain.


Russia’s invasion of Ukraine is causing enormous economic uncertainty over the implications for energy supply disruptions. Russia needs to sell its oil and gas, while Europe will struggle with any more big hikes in energy prices.

Oil pushed above $100 a barrel when Russia mounted a full-scale attack on Ukraine on Thursday, while European natural gas futures rose by around 30% to €114 per megawatt hour.

The need to supply energy to Western economies will complicate the application of further sanctions on Russia and the related effect of price shifts on both producers and consumers.

There are clear potential winners from the geopolitical tension, however, in the form of commodity trading banks, led by Goldman Sachs.

The banks that are still active in commodity trading could see little except upside from rising energy prices and an increase in volatility

Energy firms such as BP that are active dealers in commodity markets face risks from the conflict, along with the potential to reap trading profits. BP is a shareholder in Rosneft, Russia’s biggest oil producer, for example, while Shell has a stake in Sakhalin-2, an enormous integrated oil and natural gas project off Russia’s east coast.

Specialist trading firms including Glencore, Trafigura and Vitol also have stakes in Russian projects that could be threatened by tougher sanctions and deteriorating relations between Russia and Western nations.

By contrast, the banks that are still active in commodity trading could see little except upside from rising energy prices and an increase in the volatility that is key to generating profits from market-making.

Sentimental attachment

Goldman is the bank that has retained the greatest scale in commodity trading and could be the biggest beneficiary of price hikes and volatility.

It maintained its presence in commodity market-making during a prolonged period of low revenues for banks from the sector.

Many European banks withdrew from commodity trading entirely as returns fell in the middle of the last decade. Among Goldman’s Wall Street peers, Morgan Stanley and JPMorgan shifted their focus towards commodity derivatives and moved to cut costs by easing out trading veterans.

David Solomon, chief executive of Goldman Sachs

Goldman’s decision to retain commodity scale was attributed by some observers to an almost sentimental attachment to a business line that had produced a generation of its top managers, led by Lloyd Blankfein, chief executive from 2006 until 2018.

Blankfein’s successor, David Solomon, endorsed this call, despite having no personal experience of commodity trading, and the business has enjoyed a recovery in fortune in recent years.

Goldman’s commodities business, now run by former oil trader Ed Emerson, is reported to have generated more than $2 billion of revenue in each of 2020 and 2021, leading to speculation that its dealers have regained their status as top bonus earners at the firm.

These annual numbers are still below the totals of over $4 billion generated by Goldman and Morgan Stanley in some years before the Volcker Rule limited proprietary trading by banks.

The steady revenue generation by Goldman in both 2020 – a year when oil prices briefly moved below zero – and in 2021, as commodities pushed back up on growing demand, nevertheless indicates that a well-run energy and metals trading business can be a reliable profit source as long as there is both volatility and liquidity.


Commodity trading also leaves a very light footprint, which could help banks to avoid any environmental, social and governance (ESG) headaches from exploiting the revenue opportunity as energy prices surge.

Wall Street firms have been late but enthusiastic converts to the business of profiting from the shift towards ESG-based investment.

This shift has been complicated by their continuing provision of fossil fuel financing, however.

JPMorgan remains the biggest supplier of finance to the global fossil fuel industry, for example, despite joining the ‘net zero banking alliance’ last year and leading the underwriting league table for green bonds.

Banks do not have to detail their commodity trading revenues within their earnings statements, and most information about dealing windfalls emerges from industry gossip

Activists who are keen to push banks to take a more aggressive approach towards reducing their fossil-fuel financing can easily monitor bond market activity and loan exposure, in a bid to shame firms into action.

It is much harder to work out what is happening in the commodity trading markets, by contrast, or to make a direct link between market-making and endorsement of a particular commodity, such as oil or gas.

Banks do not have to detail their commodity trading revenues within their earnings statements, and most information about dealing windfalls emerges from industry gossip, followed much later by some corroboration of data by consulting firms.

Goldman simply reported 'higher net revenues in commodities' for 2021, compared with 2020, in the nearest it got to confirmation of news reports that its dealers had delivered a second strong year, for example.

The bank now appears to be positioning itself for a move to ensure that multiple groups within the firm can profit from upward pressure in commodity prices, rather than simply its traders.

Ukrainian tanks on the move on Thursday. Photo: Reuters


Towards the end of 2021 and at the beginning of this year, as global investors were considering their key allocation decisions for 2022, Goldman mounted a campaign to promote its view that a new commodities supercycle is underway, with potential upward pressure on prices for the next decade.

Jeff Currie, head of commodities research at Goldman, cited a number of reasons for sustained prices rise across energy, metals and agriculture markets.

Rising demand on the back of an economic recovery from the impact of Covid along with supply dislocation for many commodities, backed this view, which seemed to be playing out well before Russia invaded Ukraine.

A research-driven call on commodity prices by a bank is not designed in a simplistic way as a short-term ploy to deliver profits to the firm’s dealers – though an alignment in interests is obviously desirable.

Instead, research and related marketing can help to put a bank such as Goldman in front of investors as they decide what to buy and sell. This can lead to increased client volumes for the markets business at a bank, along with appetite for funds in its asset management group. And it never hurts to be seen to be right on key market shifts.

Commodity funds had already been seeing growing interest from investors in recent months, on anticipation of further inflationary pressure that is fuelled by supply concerns.

This trend was helped by backwardation in futures for many commodity markets, including oil, where longer-dated contracts trade at lower levels than near-term prices.

That allows investors and their fund managers to generate profits by rolling futures contracts forward each month, a strategy that can make money even when there is limited movement in spot prices.

Systematic trading strategies such as these do not always work as planned when markets see unusual price gyrations, and the Russian invasion of Ukraine certainly has the capacity to bring further disruption as fresh sanctions are applied and uncertainty continues over energy supplies.

Any move by China to help Russia to evade sanctions could heighten geopolitical tensions, in turn undermining global trade relations and affecting economic activity, for example.

That would not be positive for key markets such as equities in the long term.

But the short-term prognosis for commodity market makers at banks is clear: an opportunity to make windfall trading profits with limited disclosure of their dealing activity.

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