Big banks are on track for their highest commodity-trading earnings in a decade as they benefit from wild swings in oil and gold prices.
Combined net revenues in commodities from the 12 largest global banks jumped to $3.8 billion in the first half of 2020, and are on track to surpass $7 billion for the year as a whole, according to Coalition Development Ltd. That would make it Wall Street’s best year in resources since 2011.
The surge in trading revenues -- up 95% from a year ago -- came as oil prices in April plunged below zero for the first time in history, forcing investors to unwind bets and presenting a rich opportunity for Wall Street traders.
It was also driven by a dislocation in the gold market. While banks initially suffered mark-to-market losses when New York futures rose to an unusually wide premium over London prices in March, they’ve since profited from arbitrage opportunities, such as shipping metal to the U.S., according to Amrit Shahani, research director at Coalition.
“There were two sweet spots: oil and precious metals,” Shahani said. “I think this will be the best year in a decade.”
The commodity-trading bonanza marks a return to form for banks in the sector, which have struggled over the past decade with declining profits as prices cooled and regulators clamped down on risky trading.
Goldman Sachs Group Inc. epitomizes the change of fortunes: in 2017, earnings from trading commodities slumped to the lowest on record, prompting questions over the future of its storied resources division; by May this year, it had already surpassed $1 billion in trading revenues, Bloomberg has reported.
Still, few anticipate that this year’s levels of trading revenues will be sustainable, as the extreme market conditions in 2020 are unlikely to be repeated.
“This type of volatility, it’s difficult to see how this continues,” Shahani said. “I think most banks also think this is not the case: that is why they’re trying to do more long-term business.” He said banks were trying to capitalize on the current situation to persuade corporate clients to do long-term deals, such as hedging.
The strong showing by banks in commodity trading -- led by Wall Street giants like Goldman, Citigroup Inc., and JPMorgan Chase & Co. -- contrasts with the poor performance of many of the predominantly European lenders that dominate commodity trade finance. That business has been stung by losses after a string of collapses and scandals.
Coalition tracks commodities revenues at banks including Goldman, JPMorgan and Morgan Stanley. The analysis doesn’t include Australian, Canadian or emerging-market banks that have a large presence in commodities such as Macquarie Group Ltd. Coalition doesn’t comment on specific firms.
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