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Perhaps no investment bank has suffered more in recent quarters than Goldman Sachs (NYSE: GS).
In its latest quarter, Goldman Sachs reported revenues that were down 40% from a year earlier. Goldman Sachs suffered from a lack of activity – underwriting, deals and trading – in the first quarter of 2016.
That’s an embarrassment for certain for the company that Matt Taibbi of Rolling Stone famously called a “vampire squid” in 2009.
The solution for Goldman? To expand its business lines.
That’s why the company’s tentacles have now reached into the physical trading of U.S. natural gas through its commodity arm, J Aron.
Goldman Sachs, the Gas Trader
Goldman Sachs became a natural gas marketer in 2010 when it purchased the natural gas marketing division of Canadian energy firm Nexen. In 2013, this company was acquired by China’s CNOOC (NYSE: CEO).
Today, Goldman surpasses even energy giants ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) in natural gas marketing.
In 2015, the company bought and sold 1.2 trillion cubic feet of natural gas, double what it sold just two years ago. That figure is the equivalent of a quarter of the country’s residential gas consumption.
Breaking the number down further, Goldman’s gas volumes rose 71% from 2011 levels to 5.8 billion cubic feet per day in 2015. That figure, from Natural Gas Intelligence, placed the investment bank seventh on the list of U.S. natural gas traders.
Goldman Sachs, Gas and Mexico
This move into the physical trading of natural gas looks to be a smart move for Goldman Sachs.
First, it can be very lucrative. Think the “Polar Vortex” in 2014.
I believe natural gas prices may have bottomed here too in the $2.00 per million BTU range. Goldman itself projects natural gas prices may rise to $2.85 per million BTU this year.
Famed hedge fund manager David Einhorn of Greenlight Capital also foresees higher natural gas prices over the next few years roughly in the same price range as Goldman. Einhorn points to the lack of drilling at these low gas prices. Natural gas prices have been in a steep decline since early 2014.
Goldman is also taking advantage of the boom in U.S. natural gas exports to Mexico. It supplies the plants powering the mines owned by mining powerhouse Grupo Mexico (OTC: GMBXF) in Sonora. Last year, Goldman exported 22 billion cubic feet of gas for use by Grupo Mexico.
I look for Goldman to find lots of other customers in Mexico for its gas. Here’s why:
In 2015, Mexico imported 2.9 billion cubic feet of natural gas per day. Natural gas now accounts for 60% of Mexico’s electricity generation, according to Goldman. That should climb in the years ahead. According to IHS Energy, Mexican natural gas imports from the U.S. will rise to 4.4 billion cubic feet per day by 2020.
Other Factors in the Scenario
There are other reasons behind Goldman’s big move into gas trading.
Dealing in physical commodities is exempt from the Volcker rule. That rule bans proprietary trading by the big Wall Street banks. However, the Federal Reserve and other regulators are considering implementing new rules for banks involved with the handling of physical commodities.
And Goldman gets into a business that is not correlated to the ups and downs of Wall Street. Natural gas prices will move up and down based on weather and the supply/demand for that market alone. Nat gas doesn’t care what stocks do.
So I fully expect Goldman Sachs to even further expand its reach in natural gas.
To that end, Goldman recently hired Jeremy Taylor. He comes from the Swiss commodity merchant Mercuria Energy Trading. Taylor was the head of Mercuria’s North American natural gas and power trading division.
Natural gas trading may turn out to be one of Goldman Sachs’ very best businesses. Unless regulators change the rules of the game.