Goldman Sachs Loses $100 million on Natural Gas Basis Trade

Goldman Sachs has been one of the favorite analysts to use as a contrarian indicator at Traders Community. Now we hear $GS traders lost $100 million on a Natural gas basis trade last quarter.

Goldman Sachs has been one of the favorite analysts to use as a contrarian indicator at Traders Community. Now we hear $GS traders lost $100 million on a Natural gas basis trade last quarter.

Marcellus Pipelines

It has often been the suspicion in conspiracy land that the analyst calls are to push the market for Goldman traders on the other side. It would be appear this trade and other aspects of their recent second quarter earnings are not as golden as we are lead to believe. Q217 was the worst ever quarter for the Goldman Sachs commodities unit. The commodities division operates as J. Aron, a coffee and metals trader that Goldman bought in 1981.,

WSJ reporter Liz Hoffman reported on the Natural gas loss in Friday’s journal edition. Ms. Hoffman said that:

Goldman wagered that gas prices in the Marcellus Shale in Ohio and Pennsylvania would rise with the construction of new pipelines to carry gas out of the region, said people familiar with the matter. Instead, prices there fell sharply in May and June as a key pipeline ran into problems.

Goldman is now competing with less regulated firms such as Glencore PLC and Gunvor Group Ltd in the commodities trading business  as other large banks left following the financial crisis. There are many reasons for this, new regulations, the fall off of client front running business and crack down on interbank collusion in the LIBOR and Forex markets. Goldman also saw this as an opportunity with their algorithims and what they believed as more sophisticated trading models.

Goldman has risen from the 13th largest marketer of natural gas in North America in 2011 to the seventh-biggest according to Natural Gas Intelligence. This puts them as  bigger than U.S. energy giants such as Exxon Mobil Corp. and Chesapeake Energy Corp. It has been the only U.S. bank in the top 20 since 2013, when J.P. Morgan Chase & Co. sold their business to Mercuria.

Hoffman reports that “Goldman’s key miscalculation last quarter was betting that natural-gas prices in the Marcellus Shale would rise relative to the national benchmark price in Louisiana known as the Henry Hub, the people familiar with the matter said. Essentially, it was a bet on the timely completion of pipelines under construction to ferry a glut of gas out of the region. But one of those pipelines ran into trouble this spring: the 713-mile Rover, which would transport gas from the Marcellus to the Midwest and beyond.

The developer highlights the risks in the more obtuse elements of the energy market and pipelines . In this situation the negligence and arrogance from the developer, Energy Transfer Partners was almost comical (for waht of a better word). The Dallas Morning News reported industrial spills prompted regulators to delay construction on the pipeline. This increased the market discount on Marcellus gas prices,The Henry Hub natural gas price has slumped 22% this year.

In February bulldozed a historic Ohio home without notifying regulators, and scrambled to finish clearing trees before the roosting season for a protected bat species. In May, federal regulators barred Energy Transfer from drilling on some segments of the route after a series of fluid spills. The first leg of the pipeline, which had been set to come online in July, isn’t expected until at least September. Energy Transfer said it has “been working efficiently and nonstop to remediate” problems and expects to have the entire pipeline operational in January. The WSJ reports

The delays in one case quadrupled the market discount on Marcellus gas prices. At one Pittsburgh-area hub, the Dominion South, the Marcellus discount increased from 29 cents per million British thermal units at the end of March to $1.16 on June 16. Prices moved similarly for futures contracts guaranteeing fall deliveries.

For many this was a victory for the good guys. It is most likely that Goldman gas producer clients in the region were using swaps and other contracts. Looking through Marcellus drillers Q217 earnings reports many reported big gains in the value of their derivatives portfolios. This news about Goldman suggests they were on the other side. The loss also suggests $GS left the positions unhedged taking them onboard as strategic trades. Though that is pure speculation it could have been other forms of trading losses in a volatile space.

Not that Goldman always loses, last year it took a $100 million in gains  on corporate bonds. CEO Mr. Blankfein, President Harvey Schwartz and Chief Financial Officer R. Martin Chavez all came from commodities and is a key leg of their strategy.

Source: TradersCommunity, Wall Street Jounal

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