Banks’ first-quarter results, just released, showed commodities revenues improving even as some other trading results softened. Revenues could rise 50 per cent from a bleak 2010 if current trends continue this year, bankers and analysts say.
The brightening outlook is a function of deep uncertainty in oil markets, where banks such as Barclays Capital, Goldman Sachs, Morgan Stanley and JPMorgan Chase – the top four commodities dealers – have invested heavily.
While oil prices crept higher in 2010, they have gyrated wildly this year as Libya’s crude oil output vanished and the Japanese catastrophe affected energy demand. The unexpected uncertainty prompted companies to hedge again and hedge funds to take big bets once more, letting commodity bankers make money again.
Most banks refuse to disclose details on commodities revenues, let alone profit. But they provide some clues about their performance. Barclays and Goldman, each with lower revenue in the broad fixed income, currency and commodities businesses, said commodities performance alone improved in the first quarter from the same period last year. JPMorgan, which spent $1.7bn last year to acquire much of RBS Sempra Commodities, boasted of “very strong” commodities performance based on “predominantly client flow.” Morgan Stanley said commodities revenues were up “significantly” from the end of last year “due to increased market volatility”, though, like JPMorgan, it did not make an annualised comparison.
“Conditions in commodities trading are much better this year than in 2010,” one senior banker told the Financial Times. “If you have a decent size franchise in oil, you are doing pretty well,” he added, referring to the big four banks.
Glenn Schorr, a banking analyst at Nomura, estimates that investment banks will split a fee pie of $9-11bn this year in commodities, up from just $6-7bn in 2010. Revenues peaked at $14bn in 2009. Bankers talk about a pick-up in revenues of up to 50 per cent this year, although they agree revenues will not approach the previous peak.
If the commodities revenue pie is growing again, there are also more diners at the table. The historic “duopoly” of Goldman and Morgan Stanley is long gone: Mr Schorr estimates each now has about a 15-20 per cent market share. Beyond the top four, BNP Paribas, Credit Suisse, Deutsche Bank, Bank of America Merrill Lynch and Standard Chartered, among others, are all gnawing at market share. “There are too many fishes in the commodities pond,” says another senior banker.
Banks also have competition elsewhere. Energy trading is increasingly migrating to exchange and exchange-like trading venues such as the ICE over-the-counter platform, a shift that will only accelerate under the Dodd-Frank derivatives reforms.
Non-bank dealers, such as energy companies, may also receive different treatment under some of these rules, giving them a competitive advantage. JPMorgan cites “commodity trading companies” as a competitor in its annual report.
Get alerts on Commodities when a new story is published