It wasn't that long ago that many wondered if Goldman's commodity desk - once among the most powerful and profitable on Wall Street - would be quietly shut down as a result of sliding profits. Indeed, as we reported at the time, after a 75% plunge in commodity revenue at the vampire squid, which hit an all time low of less than $300 million in the year that saw the longest stretch of single-digit VIX prints on record, the future for Goldman's commodity team was bleak.
GOLDMAN COMMODITY REVENUE SAID TO DROP 75% TO LOWEST ON RECORD: BBG— zerohedge (@zerohedge) January 16, 2018
So fast forward to today when we once again get a reminder of Goldman's striking ability to reinvent (and reinvigorate) itself, with Bloomberg reporting today that revenue at Goldman's commodity desk shot past $2.2 billion in the final months of 2021, "topping a windfall it generated in 2020 for its strongest performance in a decade" and adding credence to the revival of the trading desk which a decade ago regularly generated more than $3 billion in revenue.
As Bloomberg details, Goldman’s energy traders have thrived on the wild ride of the post-covid era: "profiting in the months after outbreaks began as oil prices turned negative for the first time ever, and then benefiting again from power grid failures in the U.S. and the frenzied moves in European markets at the end of last year."
The miraculous rebound means that Ed Emerson, the head of the desk who stuck around as peers and supportive bosses left before its turnaround, will be among the highest-paid partners at Goldman with a year end-bonus that could be in the tens of millions in a year of record profits for Goldman when some of the firm’s top performers will surpass $30 million, more than what the bank's CEO has earned in recent years.
To be sure, Goldman's favorable view of commodities is hardly a surprise: the bank's in-house analyst Jeff Currie has been pounding the table with his view that dislocations around the world will create a commodities “supercycle” that lasts a decade (he rose to fame after predicting the China-driven boom of the 2000s and that decade’s surge in oil prices above $100 a barrel). Just this morning he published another note predicting that commodities are set for another year of outperformance.
Whether he is right or not remains to be seen, but Currie's contagious commodities euphoria underscores a key shift on Wall Street: after years of malaise, commodities are once again drawing interest and investment as prices surge (especially when covered in a nice, fake ESG wrapper).
To be sure the commodities unit had played starring roles in Goldman’s ups and downs for decades, ever since as Bloomberg reminds us, a broker in that business - J. Aron & Co. - enlisted the investment bank’s help to sell itself at the start of the 1980s. Goldman, spotting an opportunity to expand, offered to be the buyer, a transaction which paved the way for a group of commodities executives who would eventually run trading, investment management, human resources and even the whole company, with Lloyd Blankfein and Gary Cohn rising to CEO and president and running the bank for decades.
Indeed, it was Blankfein’s support for the commodities business that helped spare it from being dismantled during the industry’s long slump in the past decade. Here Bloomberg reports that as Blankfein prepared to hand off his CEO title in 2018, he unsuccessfully tried to persuade Isabelle Ealet to delay her exit as co-head of trading until the commodities desk, which she previously ran.
And while other veterans of the group also headed for the exits as well, with Goldman's commodity co-chiefs departing within a matter of months, Ed Emerson, 45, found himself holding the top seat alone in 2019, right before the market’s turn.
The Argentina-born, polo-playing Brit is described by colleagues as protective of his staff but also unerringly commercial -- a compliment in some Wall Street circles that emphasizes a focus on profits over niceties. In internal discussions, he’s known to relentlessly argue his views and sometimes butt heads with bosses.
As Bloomberg reports, Emerson rose up through oil trading during an era of spectacular profits in the 2000s, a time when Goldman’s name commanded undisputed respect in those markets.
His fate of Goldman's commodity desk was far less certain under Blankfein's successor, David Solomon who is a product of Goldman's dealmaking tradition not its trading group. When the veteran dealmaker took over from Blankfein in 2018, the team of colleagues David Solomon elevated sweated over the capital allocated to commodities, the paltry revenue it was generating and the miserable return on equity that might antagonize shareholders.
It got so scary that several months in, Goldman's then new President John Waldron tried to reassure the commodities group that the firm wasn’t getting out of the business. Meanwhile, Emerson and senior executives campaigned to keep the core of its operations intact, making the case that its best years came in moments of tumult. Part of the idea was that if activity resumed, Goldman could be better positioned than rivals to capitalize. He was right, and while the ax never swung, the business instead found ways to cut costs and expand electronification, using a service dubbed e-Aron in an ode to the group’s roots.
By 2019, the desk was on steadier footing. And then came Covid-19 when the bank thrived amid swings in oil and precious metals, especially with so many of its competitors lacking talent and depth in their own trading groups to satisfy frentic customers. Then last year, Goldman navigated turmoil in gas and power trading, capitalizing on price spikes in Europe that hurt many big energy consumers.
And as Goldman's commodity group enjoyed a renaissance, the bank's shares soared 45% last year, their best annual performance since their post-crisis rebound in 2009 as the bank and its investment banks saw their earnings soar in the past two years, driven by flurries of investor trading and corporate dealmaking.
Looking ahead, many expect a far more muted environment for Wall Street, but even if markets normalize and revenue from commodities shrinks anew, the Goldman commodity team has once again cemented itself as an integral part of the bank's trading arm. Whether that means that oil will surpass $100/barrell as the bank's clients follow Goldman's research analysts' bullish forecasts, remains to be seen.