Financial institutions are being tempted back to the commodities market after a long period of retreat, with price volatility and shifting global trade flows driving all-time record earnings, research from Oliver Wyman says. 

Bank lenders accounted for around a fifth of global commodity trading gross margins in 2022, the consultancy says. Taken together with hedge funds – previously excluded from the data due to their “limited role” – the financial sector earned approximately 27% of all commodity trading revenue last year, double the figure five years ago. 

At the same time, revenues have increased significantly in absolute terms. The overall size of the commodity trading market hit an all-time record last year, with gross margins reaching an estimated US$115bn, up from US$72bn the year before and more than triple the total for 2018. 

“Banks are back after some firms invested in their capabilities, and now, after years of retraction, the sector represents nearly 20% of the market,” Oliver Wyman says in a report published this week.  

“Growth continued among hedge funds, too… now that they have returned to commodities, drawn by the uncertainty in the markets.” 

Price volatility has proven challenging for smaller commodity traders, but for larger players with access to financial products such as hedging and currency swaps, those fluctuations present a major opportunity to boost earnings. 

Sophisticated traders are also able to benefit from “drastic shifts” in supply chains, such as changes in trade corridors for oil, gas and metals following the introduction of sanctions on Russia, the report says. 

Those able to redirect cargoes and source new markets – while continuing to manage liquidity issues – are “well positioned to handle the disruption and keep commodities flowing”, it says. 

In the oil market, the report finds countries that have not imposed sanctions, particularly China and India, are now importing around 70% of Russian seaborne crude oil, up from around 20% a year ago. Europe has turned instead to the Middle East and Africa – “a longer, more complicated and expensive route”. 

For gas, a spike in demand for liquified natural gas (LNG) from Europe drove up prices and caused shortages in the Asia Pacific region, while also exposing the US market to European weather conditions. Again traders “who understand gas have benefitted the most from the scenario”, it says. 

The gulf between larger and smaller commodity traders is laid bare by the report. Independent traders earned around 30% of the US$115bn total revenue, but that market share is concentrated among just five firms, the report says. 

In 2022, traders with strong access to financing were able to “drive increasingly capital efficient returns”, whereas others “had to abandon in-the-money positions due to lack of liquidity”. 

“To a large part, systems-based clarity on the health of market, credit, and liquidity exposure and its integration into day-to-day decision-making helped found both the agility and determination that separated winners from losers,” it says. 

Demand for commodity finance is expected to continue increasing. A January study from McKinsey estimates that up to US$500bn in additional financing will be required to facilitate commodity flows, with margin calls rising to US$1.5tn in the energy sector alone. 

Traders’ working capital requirements could treble for crude oil and increase sixfold for LNG, it adds. 

At the same time, there is growing support for commodity flows from public bodies such as export credit agencies, as a result of the strategic importance of switching to non-Russian energy imports. 

A landmark US$3bn loan to Trafigura in December, jointly arranged and underwritten by Deutsche Bank and partly guaranteed by Germany’s Euler Hermes Aktiengesellschaft, prompted industry insiders to predict a market return for lenders that had become more cautious in recent years.