Goldman Sachs, the leading commodities trader among Wall Street’s largest investment banks, is looking to reverse the fortunes of its commodities trading business that posted its worst performance on record last year.
Goldman now reportedly plans to be the first top Wall Street bank to venture into a new and promising commodity market, in which the biggest trading houses have already entered and taken nearly 10 percent of the global trade: liquefied natural gas (LNG).
Goldman Sachs is in talks with Cheniere Energy—the owner of the first U.S. LNG export terminal Sabine Pass—to buy a cargo of LNG, with the aim to quickly resell it to another buyer, the Wall Street Journal reports, citing people familiar with the matter.
The investment bank started looking for an LNG contract to buy at the end of 2017. Goldman and Cheniere are currently negotiating, but talks may not necessarily result in an agreement, according to the Journal’s sources. The bank may also be looking to purchase LNG from another seller.
The average spot cargo of LNG leaving the United States is worth around US$30 million at current prices, the WSJ says, quoting estimates by Wood Mackenzie.
Should Goldman manage to strike a deal for a first LNG cargo, it would set foot on a growing and promising commodities market in which the U.S. is expected to play an increasingly prominent role. A potential LNG cargo acquisition could also help the investment bank to improve the results at its commodities trading business, which suffered a lot last year.
Goldman Sachs’s net revenues in Fixed Income, Currency and Commodities (FICC) Client Execution dropped by 30 percent annually to US$5.30 billion in 2017, due to significantly lower net revenues in commodities, interest rate products, currencies, and credit products amid low levels of volatility and low client activity. This year, the commodities unit performance has been much better, with net revenues at the FICC division surging 45 percent on the year to US$1.68 billion in Q2, with significant increases in commodities.
Goldman is now looking to take advantage of the growing LNG market, in which the world’s largest trading houses have already gained a foothold.
In recent years, Trafigura, Vitol, Gunvor, and Glencore have grown their LNG trading businesses. Last year, these four firms traded approximately 27 Mt of LNG, or 9 percent of total LNG sold worldwide, Wood Mackenzie has estimated.
Early this year, Cheniere Energy and Trafigura struck an LNG sale and purchase agreement, under which Trafigura would buy around 1 million tons a year of LNG from Cheniere on a free on board basis for 15 years beginning in 2019. The purchase price for LNG will be indexed to the monthly Henry Hub price, plus a fee.
Goldman’s potential LNG cargo purchase would come at a time in which U.S. LNG export capabilities and markets are growing. In 2017, LNG exports quadrupled compared to 2016, and all cargoes originated from Louisiana’s Sabine Pass liquefaction terminal, which was the only LNG export terminal until recently.
The Cove Point LNG export project in Maryland, the second LNG export facility in the continental United States after Sabine Pass, started operations earlier this year. Another fourLNG export projects are underway across the U.S.—Elba Island LNG in Georgia, Freeport LNG in Texas, Corpus Christi in Texas, and Cameron LNG in Louisiana.
Last month, the U.S. Department of Energy announced a final rule—effective August 24, 2018—that will fast-track approval of applications for small-scale exports of natural gas, including LNG, from U.S. export facilities.
As the U.S. and global LNG markets are growing, it looks like a top investment bank such as Goldman Sachs doesn’t want to miss out the opportunity to rake in some more profits from commodity trading.