Goldman's Losing Bet on Gas Said to Hurt Second-Quarter

(Bloomberg) -- Goldman Sachs Group Inc. lost money trading natural gas in the second quarter, one reason its commodities business posted the worst financial results since the firm went public in 1999.

The loss resulted from failing to properly hedge bets on the direction of gas prices, and was one of several areas in which the business suffered, a person familiar with the matter said, asking not to be identified discussing non-public information.

Goldman Sachs lost more than $100 million on a wager that gas prices in Ohio and Pennsylvania would rise, the Wall Street Journal reported earlier Friday. Instead, prices fell sharply in May and June.

Chief Financial Officer Marty Chavez said last month that the poor performance in commodities resulted from the “market backdrop” and lower client activity. He said the firm “didn’t navigate the market as well as we aspired to or as well as we have in the past.”

A spokesman for the New York-based company declined to comment on the loss.

Goldman Sachs, for decades the leading commodities trader on Wall Street, has been reviewing the business after declining volatility and increased regulatory scrutiny hurt profit. Its commitment to the division in recent years set it apart from competitors Morgan Stanley, JPMorgan Chase & Co., Barclays Plc and Deutsche Bank AG, which cut back or exited commodities trading.

Natural Gas

The gas market has been whipsawed by developments with the $4.2 billion Rover pipeline, one of the biggest lines set for the U.S.’s most prolific shale producing region in Appalachia. Once fully operational, Rover will be able to transport 3.25 billion cubic feet a day, or 13 percent of current Appalachian gas production.

The Marcellus Shale, primarily in Pennsylvania and West Virginia, has been the powerhouse behind the shale-gas revolution of the past decade. Gas volume quickly outpaced pipeline capacity, which has been hindered by public backlash over safety and environmental concerns. Transport bottlenecks have turned Appalachia into one of the most volatile gas trades.

Prices at the Dominion South Point hub, a proxy for the region’s gas production, dropped to a record low of 29 cents per million British thermal units on Sept. 30, or $2.55 less than the Henry Hub in Louisiana, the delivery point for New York futures. The spread between the two is closely watched by traders. The 100-day volatility for Dominion South Point is almost three times higher than Henry Hub.