Back in late March, Goldman stunned commodity traders when its energy strategist Jeffrey Currie predicted that landlocked oil (such as WTI, and unlike Brent) could trade negative in the very near future as a result of the massive demand plunge in oil and gasoline consumption resulting from the coronavirus shutdowns coupled with the supply surge unleashed by Saudi Arabia as part of its brief market-share war with Russia. This forecast was impressive for two reasons: just 20 days later, the prompt WTI contract indeed plunged into negative territory for the first time ever as those who were set to receive delivery of WTI barrels had no space to store it and ending paying buyers to take it off their hands, sending the price of the maturing contract to as low as negative $40. The second reason is that Goldman's trading desk actually took Goldman's advice and prepared for oil to crater.
As a result, while countless (most retail) traders suffered massive losses as oil plunged from $15 to -$40 in one session, Goldman made a killing. According to Bloomberg, Goldman's commodities desk generated more than $1 billion in revenue this year through May, benefitting from oil's wild swings for its best start in a decade.
The unprecedented mayhem in oil markets sent crude plunging below zero, left corporate risk managers scrambling and forced retail investors to unwind bets. But it presented an opportunity for Wall Street traders to score big gains. The windfall is a redemption for the unit, which less than two years ago faced an uncertain future under new boss David Solomon, who frowned upon a business that wasn’t making enough money.
As Bloomberg adds, much of the boost came from oil trading overseen by Anthony Dewell and Qin Xiao, "who correctly positioned their desks for the collapse in prices" by which Bloomberg means they actually read and traded on Goldman's own in house research - which is traditionally meant to lure clients to take positions opposite to the house's own prop positions but in this case actually was spot on - such as this report from March 30 which laid out precisely what would happen.
(Click to enlarge)
As Bloomberg further details, the bank's early gains from that turmoil were under Xiao:
The Singapore-based partner, known as QX to colleagues, oversees the commodities business in Asia. Even as stocks ticked toward record highs, Xiao anticipated the risk of an economic meltdown. It soon came to pass as the pandemic took hold in Asia and went global. He was positioned accordingly for oil and a variety of related products as prices slumped by two-thirds in the first quarter.
Dewell, as Xiao’s London-based counterpart, ran trades that correctly anticipated a collapse in the WTI futures market in April as storage tanks filled and prices spiraled toward zero. That move prompted a wave of forced selling from investor products such as exchange-traded funds that weren’t designed with the possibility of negative prices in mind.
The blockbuster trade was reminiscent of an era a decade ago when Goldman's commodity unit generated annual revenue of around $3 billion. But it later fell out of favor as those earnings slumped, and it even faced the risk of getting dismantled as Solomon’s team took over and questioned its necessity. Ultimately, the new management backed off, and instead carried out modest cuts and publicly affirmed support for the division. Considering the $1 billion return on that decision, DJ-Sol may want to reconsider if scrapping what was once Wall Street's most respected trading desk and replacing it with a credit card and loan business for subprime Americans is really what Goldman wants to be remembered for.
More Top Reads From Oilprice.com:
- Morgan Stanley: This Oil Rally Won’t Last
- OPEC+ Deal Fails To Give Prices Major Boost
- OPEC+ Agrees On Extending Record Output Cuts