* Goldman says commodity revenue "significantly higher"
* Morgan Stanley says "strong performance" bolstered FICC
* Weather volatility, client business fuel growth-Morgan CFO
* "Starting to see" benefits of rivals scaling back-Goldman
(Updates with Goldman quotes, details throughout)
By David Sheppard and Lauren Tara LaCapra
LONDON/NEW YORK, April 17 Goldman Sachs
and Morgan Stanley both cited stronger commodities
trading as a bright spot in the first quarter, aided in part by
extraordinary volatility caused by the coldest U.S. winter in
The two longest-serving banks in the sector took on more
risk in the quarter, and may be benefiting from rivals scaling
back or quitting the raw materials trading business due to new
capital and trading regulations and slimming profit margins,
underscoring the benefits of sticking out a tough patch.
"The firms that are announcing exits from commodities, for
example, they weren't in those businesses in the 1990s," Goldman
Chief Financial Officer Harvey Schwartz said. "We got into
commodities in 1981."
Morgan Stanley, which is selling its physical oil trading
arm to Russia's Rosneft but will retain its large power and
natural gas desks, said a "strong performance" in commodities
helped boost its wider Fixed Income and Commodities (FICC) net
revenue to $1.7 billion from $1.5 billion.
"We had real strength in commodities, given volatility in
the market driven by weather, and we had a real robust client
activity," Morgan's Chief Financial Officer Ruth Porat told
Reuters. She said commodities revenues would still have been
"slightly" higher excluding physical oil trading.
Goldman, which has said it has no intention of backing away
from the J Aron franchise it bought three decades ago, said
"significantly higher" net revenue in natural resources trading
compared with early 2013 had helped offset lower returns across
the rest of FICC.
Asked whether energy markets were the main driver, Schwartz
said: "That's where the primary volatility was."
The banks offered no further details, but market sources
said they appeared to be among the biggest trading beneficiaries
of the deep freeze that swept much of North America this winter,
triggering the greatest price volatility in years for many
regional fuel, electricity and natural gas markets.
Aided by sophisticated models that process weather data in
seconds, one popular spread trade was buying U.S. natural gas
and selling in Europe, which enjoyed the warmest winter on
record, trading sources said.
They may have also benefited by holding fuel or natural gas
in storage, releasing it to meet surges in demand. For instance,
physical natural gas prices at the primary New York Transco hub
E-TSCO6NY-IDX in mid-January surged more than 20-fold to $120
per million British thermal units in one day.
"The liquids side of it was getting to be very seriously
constrained because of the cold snap ... if you have the storage
and the inventory on hand, you clearly benefited from that,"
said Patrick Reames, Managing Partner and Commodity Technology
Advisory, in Sugar Land, Texas.
The banks do not provide any financial information about
their commodity trading, but analysts reckon that Goldman and
Morgan likely contributed around a third of the overall
industry's estimated $4.5 billion in revenues last year.
The banks were not alone in benefiting from the gyrations,
which appeared to cast winners and losers regardless of their
place in the market.
The harsh weather delivered a series of unexpected jolts,
including an unprecedented shortage of propane in the Midwest
that caused prices to treble, a surge in ethanol prices to more
than gasoline due to slower rail deliveries and an unusual turn
by some East Coast generators to burn oil for power.
One large utility operator in the U.S. Northeast was able to
sell some excess natural gas to power generators at huge profits
on the coldest days of the winter when prices in New York
averaged over $30 per mmBtu, a source familiar with the trades
said. Michigan-based utility DTE Energy said it lost $3
million on energy trading in the last quarter of 2013.
Cargill, one of the world's largest commodity traders, said
its quarterly earnings fell 28 percent due to several market
disruptions, including a trading loss in power markets that one
industry publication put at over $100 million.
While there has been no suggestion that big traders may have
exacerbated the price spikes, adding to rising consumer energy
costs, the strong results come at a delicate time for Wall
Street's powerhouses as they seek to fend off tougher rules that
could curtail their physical trading operations.
The Federal Reserve is now reviewing public comments on
whether it should push back banks' decade-long expansion into
the raw materials supply chain over fears such risky trading
could endanger the financial system - or that it might allow
Wall Street too much sway over commodity prices.
The upbeat revenue figures also offered signs of hope for a
business line that's been under intensifying margin pressure in
recent years due to restrictions on trading with banks' own
money, rising capital requirements, and signs the so-called
commodities super cycle may have peaked.
Thursday's results may also illustrate how Goldman and
Morgan Stanley are benefiting from rivals exiting or scaling
back in the sector, including one-time top five firms like
JPMorgan and Deutsche Bank.
"Right now it feels like we're starting to maybe see the
beginnings of some marginal benefit of competitors exiting parts
of our business that otherwise quite frankly they had charged in
with excess," Schwartz said.
The top 10 banks in commodities made $4.5 billion from
natural resources trading in 2013, a report from UK analytics
firm Coalition showed earlier this year.
While significantly below the near $14 billion made by banks
in commodities in 2008, it still represents a sizeable chunk of
Wall Street's overall earnings.
Both Goldman and Morgan Stanley reported an increase in
commodities exposure known as Value-at-Risk (VaR) from the last
quarter, with Goldman raising its VaR to $21 million, the
highest in a year.
Morgan Stanley increased its commodity VaR to $20 million
from $18 million, despite preparing to sell its merchant oil
trading business to Russian energy major Rosneft.
Goldman's overall FICC revenue fell 11 percent to $2.85
billion from the same period last year.
(Reporting by David Sheppard in London and Lauren Tara LaCapra,
Scott DiSavino and Cezary Podkul in New York; Editing by