Banks won’t return to commodity markets, conference hears

Energy Risk Asia: energy majors and other entities taking up space vacated by banks

Energy market participants in Asia do not expect investment banks to re-enter the commodity market in the next five years, according to a poll at the Energy Risk Asia conference in Singapore.

Three-quarters (73%) of delegates said they expected that “their involvement will reduce and be replaced by other entities” with only 24% predicting a return. Just 6% expect banks to make a significant move back into commodities within the next five years.

The last five years have seen major banks around the world pull back from the commodities market in the face of poor results, higher capital requirements and tighter regulation. Citing environmental concerns, in January 2014 the US Federal Reserve announced it would impose tougher oversight on the sector.

Analyst Coalition reported earlier this year that commodities sales and trading at the 12 largest investment banks totalled $2 billion in 2017, down 42% from 2016.

As major banks have cut their physical commodities holdings and laid off commodities specialists, non-bank physical players have grabbed market share from banks, particularly in natural gas and electricity markets.

Yet recent rises in commodity prices, especially crude oil and natural gas, have boosted sector revenues at some banks in 2018. Goldman Sachs reported “significant increases in commodities” revenues in the first half of the year: within its fixed income, currencies and commodities division, net revenue surged 45% on the year to $1.68 billion in Q2, although it fell back to $1.31 billion in Q3. Meanwhile, first-half commodity revenues for the same 12 banks in Coalition’s survey were $2.1 billion.

But a return to favourable market conditions will not necessarily translate into more bank activity, delegates told the conference on November 22, as the space has become filled with competition from other participants.

“I would hope that you would see a return of banks to commodities. They provide liquidity and a different kind of analysis,” commented John Driscoll, director of consultancy JTD Energy Services and a former trader for several major energy producers. “But they will be competing with other companies that are already in the banks’ traditional areas, like trade finance.”

Kate Roh, director of Asia-Pacific sales at Engie Global Markets, an energy trading platform, argued that energy majors could now fill the banks’ niche: “The energy companies now have similar systems to provide hedging and so on to clients.”

Conference chair Peter Godfrey, managing director of Singapore’s Energy Institute, a trade association, agreed: “The big traders, BP, Shell and so on, have a much more holistic view of how to trade all types of energy.”

However, a different view came from Hassan Al-Alawi, portfolio manager at Bahrain’s Oil & Gas Holding Company, who believed banks were poised to re-enter the sector.

“I don’t think [bank] involvement will reduce further,” Al-Alawi told the audience. “They are conservative, but they will come back – they have been on their toes for the last few years but they are returning.”