Big Bank meets Big Oil: Goldman’s coming to Houston

Goldman Sachs will open an energy sales and trading desk in Houston this year, putting nearly a dozen people to work trading physical products such as oil.

The Houston office will be headed by Trey Griggs, a managing director in U.S. energy sales in New York, who will relocate to Houston, according to persons familiar with the plans.

Ben Freeman, a vice president in crude oil trading in London, will also move to Houston as head of trading.

The new office will cover sales and trading of crude oil, refined oil products, natural gas liquids and coal, according to the source. The traders will be in Goldman Sachs’ existing Houston offices at 1000 Louisiana Ave. downtown.

SparkSpread.com first reported on the move earlier on Friday.

There appear to be several reasons for the move, including the difficulty of finding and keeping traders with appropriate experience. Most of Goldman’s New York traders deal in financial transactions that don’t include the physical delivery of commodities.

The new trading and sales desk will also put the fifth-largest bank in the U.S. by assets closer to key customers, such as oil and gas producers.  

The firm’s financial commodities operations will continue to be based in New York.

Goldman Sachs is one of several banks that, along with hedge funds and some of the oil majors, are widely seen as trading heavily in oil futures contracts in a way that artificially drives up prices. Earlier this month, Commodity Futures Trading Commission head Gary Gensler said speculators are a huge part of the market, with some 80 percent of trades being conducted by companies that never take actual delivery of the physical commodity.

While just how their trades impact the market isn’t clear, whenever the bank’s analysts (who are in a different business unit from the commodity traders) talk about oil prices, markets pay attention. Earlier this year, Goldman said oil would reach $135 per barrel, which helped push up prices for at least several days.

Goldman’s move comes as the CFTC draws closer to finalizing rules related to the Dodd-Frank Act, which is expected to limit the size of commodity futures contracts that companies can hold at any given time. The rules are aimed at preventing companies that don’t physically use oil, natural gas or other commodities from being able to influence prices.

Goldman Sachs may help customers that produce or use oil and gas protect themselves against the risks associated with price swings, but they most likely will be classified as a non-commercial trader, meaning the size of the positions they will be allowed to hold under the new rules will likely be smaller. Perhaps this boost to the physical side of the business is an effort to argue for higher position limits for the bank?

Goldman Sachs officials have met with CFTC representatives to discuss the Dodd-Frank rules more than any other market participant, according to an analysis of meeting disclosures by Energy Risk Magazine.

Goldman reps met with CFTC staff at least 49 times between July 26, 2010 and May 26, 2011. Twenty-six of those meetings were done with other financial institutions, but the company also met solo with CFTC commissioners and staff on 23 occasions.

The most frequently discussed topics were product definitions, the registration of new swap execution facilities, and the setting of federal position limits, according to Energy Risk.

5 Comments

  1. tantalus

    For all the obvious reasons, and i’ll spare everyone the rant, it just grates on me that you can’t get away from them.

    #1
  2. matt

    They have had part of their natural rsc investment banking group here for a while, it makes sense to have commodities here as well.

    #2
  3. KB

    “While just how their trades impact the market isn’t clear,”
    ———–
    It’s very clear. They’re speculators who drive the price up and make bundles of cash for themselves and not taking physical delivery of it and making everyone else suffer with the results…inflation, higher cost of living, higher food prices, little things like that. I’m sure they’re only moving here since it’s the best real estate market in the country…again. They can’t afford their New York digs…again. Same old story…movin’ to Texas.

    #3
  4. ijm

    KB – they arent moving the company to Houston….they are expanding here…there’s a difference. Also, why is it a problem for a commodity trader not taking (or making) physical delivery of oil when trading futures contracts? Not sure how you equate that to inflation and higher cost of living (newsflash – spec traders also make money when the market drops too…so if the market drops a buck and Goldman makes a chunk of money, how does your cost of frosted flakes go up?)

    #4
  5. KB

    ijm…if it has to be explained to you, then you need to take a class in trade 101. I don’t have the time to start from scratch.

    #5