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Traders in commodities who have endured a multi-year slump in revenues now hope that a combination of bad weather in the short term and longer-term progress on environmental issues will create sustained price volatility and the opportunity to make money.
Named storms including Harvey and Irma have disrupted oil refining and delivery in the US and generated increased energy trading opportunities, along with price swings for agricultural markets. Analysts and traders have grasped that news flow alone can increase returns in markets affected by natural disasters, even when actual disruptions to supply are not great. One study found that crude oil contracts returned 47% in periods when news flow about hurricanes was high in the US, while heating oil generated 71% and gas 87%.
The biggest commodity moves have been in base metals, however. Copper began an upwards drive in the summer that was accompanied by heavy trading volume. By early September there had been six successive weeks of record net long positions in futures on Comex, the Chicago Mercantile Exchange’s commodities exchange.
Pollution
Copper hit a three-year high partly because of the usual short-term dynamics of supply, but also in anticipation of sustained increased demand for its use in electric cars.
A move towards a more environmentally aware future was also behind a rise in prices in other metals including aluminium and zinc.
China is finally taking serious steps to tackle its endemic pollution problem in a bid to head off dissent from a population that is suffering health challenges. Part of this push involves a clampdown on illicit mining of metals; that has helped to boost prices, as has optimism about broader economic growth in China.
Goldman may announce a shift to a more client-centric commodities model when it pitches its plan for a revival of its broader fixed income business
If there is a recovery in both volatility and absolute prices for commodities, it will come just as the end of a trading era had seemed in sight.
Oil trading veteran Andy Hall announced in August that he was shutting his main Astenbeck hedge fund after sustaining double digit losses for the year and abandoning his long-term thesis of a recovery in prices to around $100 a barrel.
Underperformance
Asian-based commodity trading firm Noble also appeared to be lurching towards failure. And Goldman Sachs, the last bank to combine aggressive commodity positioning with lower risk client service, admitted that failure to navigate commodity markets had contributed to another quarter of underperformance for its broader fixed income franchise.
The Coalition index of performance at 12 leading investment banks recently found that commodities revenues in the first half of 2017 slumped by 41%, compared with the same period in 2016, to a total of just $1.3 billion. That is the lowest total recorded since Coalition began to track revenue in 2006 and is less than Goldman Sachs alone earned in some quarters at the peak of the boom in commodities trading.
Goldman may announce a shift to a more client-centric commodities model when it pitches its plan for a revival of its broader fixed income business. Its senior executives must be hoping that a recovery in commodity volatility lets its traders give a boost to this strategy.
One reason that Goldman has been reluctant to follow other banks into a full-scale retreat from commodity sales and trading is that many of its senior executives worked in the area early in their careers. CEO Lloyd Blankfein worked in metals sales at J Aron before it was acquired by Goldman. And Isabelle Ealet, one of three global securities co-heads at Goldman, ran the commodities unit before rising to her current position in 2012.
