Goldman Cuts Commodities Risk to 16-Year Low as Traders Struggle

(Bloomberg) -- Goldman Sachs Group Inc. cut back risk-taking in its struggling commodities unit to the lowest in 16 years as the Wall Street bank forecast the weakest annual performance on record for the business.

The bank’s average daily value at risk, or VaR, in commodities -- a measure of how much it could lose on a normal trading day -- fell to $9 million in the third quarter. That’s down 47 percent from the previous quarter, and the lowest quarterly reading since the third quarter of 2001.

Marty Chavez, Goldman’s chief financial officer, said that "reduced commodity positions" helped drive down the bank’s overall VaR for the quarter.

Read: Goldman Total Trading Risk Falls to Lowest Level in 15 Years

Goldman Sachs, for decades the leading commodity trader on Wall Street, has been reviewing the business after declining volatility and increased regulatory scrutiny hurt profit. Its global head of commodities is leaving the bank, and it’s likely to lose its commodities crown to Macquarie Group Ltd. of Australia, Bloomberg reported last month.

The performance of Goldman’s commodities unit improved in the third quarter compared with the second, when the bank posted its worst result for the division since its IPO in 1999, Chavez said. Nonetheless, Goldman is still "on track" for its worst annual commodity performance on record, he said.

He said that "inventory challenges" in the commodities division had accounted for half of the decline in the bank’s overall Fixed Income, Currencies and Commodities trading revenues in the first nine months of 2017 compared with the same period a year earlier. Net FICC revenues fell by 23 percent -- or $1.26 billion -- over the period.

That implies a drop of about $630 million in commodities trading revenues. Goldman’s net commodities trading revenue in 2016 was a little under $1.1 billion.

Losing trades in Goldman’s natural gas division hurt the bank’s commodities division in the second quarter. Those trades continued losing money in the third quarter although the losses were less, according to a person familiar with the matter.

To contact the reporter on this story: Jack Farchy in London at jfarchy@bloomberg.net.

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net, Lynn Thomasson