For decades, sellside banks and broker dealers were an important link between buyside traders and commodity producers, providing opportunities for physical exchange as well as speculation. However, faced by a trifecta of challenges – additional competition from non-bank commodity firms and buyside trading firms, growing regulatory pressures as well as technologically advances taken up by others – led sellside firms to retrench from the commodities trading business over the past decade. While 2023 was a boom year for commodities trading, it was followed by a 20% decline in commodity trading revenues in 2024.
By GreySpark’s Rachel Lindstrom, Senior Manager
Commodity trading groups, including banks, hedge funds and non-bank commodity traders, made record commodity trading profits of USD 104 bn in 2023. Increased revenues, underpinned by the Russia-Ukraine war, supercharged volatility and profits. The wave of new entrants into the sector, including tech-focused buyside traders and hedge funds, was driven by rising returns from power trading.
Despite the retrenchment of banks in the commodities sector overall, they remained heavily involved in the non-renewable energy sector, providing record levels of financing to fossil fuels this decade. The new US President Trump’s pro-fossil fuel administration may enable banks to maximise returns from this sector of the commodity market.
Rise of Non-bank Commodity Traders and Retrenchment of Banks’ Commodity Trading
Ten years ago, banks aimed to offer everything, everywhere to everyone, but this was not to last. Investment banks began experiencing decreasing opportunities in the market due to increased competition from non-bank traders, trading restrictions as a result of the Volcker Rule, and capital restrictions as a result of Basel III. In response, sellside firms, over the last decade, drastically reduced their product coverage and retrenched to select business lines where they could be competitive. Compounding this effect, in 2024, a deglobalisation trend began to emerge and, apart from the top tier, banks adapted by narrowing the breadth of their services in terms of customers, regions or asset classes even more.
Figure 1 shows the decline in commodities OTC derivatives trading activity, highlighting reduced market activity from banks since the 2008 financial crisis, which exposed huge risk miscalculations in the OTC derivatives market.
Commodities markets were a particular target of global bank streamlining due to their volatility and the high costs of capital assigned to them under the Basel III framework. In most of the world, market share is increasingly being seized by extractors, miners and energy corporations, as well as by specialist traders and hedge funds. However, several high-profile defaults involving non bank commodity traders highlighted the risk of trading with unknown entities. For instance, in 2023, JP Morgan Chase thought it had purchased 54 metric tonnes (USD 1.3 mn) of nickel, storing it at a warehouse facility in the Netherlands. However, the bags contained nothing more than shiny rocks. Such incidents drove the sellside to take a more risk averse approach when dealing with less well-known commodity trading counterparties.
Non-bank market share has been fuelled largely by independent commodity traders, such as Vitol and Trafigura, which have experienced five consecutive record-breaking years in terms of profitability. Indeed, in 2025, non-bank commodity trading firms hold reserves of as much as USD 120 bn in aggregate. So, as large non-bank commodity traders are more cash-rich than ever, and their reliance on banks for funding is diminished, one option open to banks could be to provide financing to smaller or medium-sized commodity trading firms. However, Nasdaq’s incident with the Norwegian trader serves as a visceral reminder of the pitfalls of exploring new businesses with uncertain risk profiles.
The Oil Industry – a Slippery Business
The retrenching of banks from the commodity trading industry and the encroachment of non-bank commodity traders can be seen clearly in the oil industry. In 2014, JP Morgan Chase sold its physical commodities arm to refinery Mercuria Energy in 2014, followed shortly by Goldman Sachs, which sold its coal mining division to Murray Energy in 2015.
Increasingly, non-bank commodity traders awash with cash, are investing in refineries, such as Vitol. In March 2024, Vitol launched a EUR 1.7 bn bid to acquire Italy’s Saras (owner of the largest refinery in the Mediterranean on Sardinia). Gaining a foothold in the refining industry gives non-bank traders more options when deciding whether to send certain oil grades to their own refinery or elsewhere on the open market. In addition, it gives more reason and opportunity to take paper positions to hedge their physical exposure, allowing them to become bigger players in the swaps and futures markets. As such, physical commodities merchants are also setting up derivatives trading desks. In addition, macro hedge funds are expanding commodity trading teams by hiring more bank-based traders with alluring financial compensation packages stemming from their soaring profits. For instance, Goldman Sachs’ top commodities trader, Anthony Dewell, shocked the market when he joined Millenium, a hedge fund in 2022.
Banks Toning Down ESG Commitments
The second Trump administration is the catalyst for many US financial firms to step away from the Glasgow Financial Alliance for Net Zero (GFANZ), as firms expressed concern about the potential political and legal ramifications of being seen to be active on decarbonisation. As a consequence, GFANZ dropped requirements for members to be aligned with the Paris agreement – a legally binding international treaty that aims to reduce global greenhouse gas emissions and limit global warming – to halt the exodus of large financial institutions, such as BlackRock. Meanwhile, the US administration terminated more than USD 300 bn in US green infrastructure funding.
Buffeted by the changing direction of the winds across the globe, banks are visibly backing away from their sustainability-related commitments, citing regulatory uncertainty, and shifting their focus back to traditional investment strategies. In early January 2025, JPMorgan Chase became the latest bank to withdraw from the Net Zero Banking Alliance (NZBA), a global coalition of financial institutions aiming to achieve net-zero emissions by 2050. They follow in the retreating footsteps of Citigroup, Bank of America, Morgan Stanley, Wells Fargo and Goldman Sachs. In fact, the world’s major banks have provided a total of USD 6.9 tr to the fossil fuels sector in the eight years since the signing of the Paris Agreement in 2016, and JP Morgan Chase, Mizuho and Bank of America were named as the largest fossil fuel industry financers in 2023.
Against the backdrop of Trump’s pro-fossil fuel agenda, banks are leaning on their already-established presence and reputation in fossil fuel markets, while exploring the most lucrative commodities in that sector such as liquified natural gas (LNG).
Commodity Trading Trends
The commodity trading landscape is currently underpinned by four key trends:
Changing role of the non-bank commodity trading firm – Non-bank commodity trading firms are increasingly utilising derivatives to supplement their physical commodities trading businesses, in order to hedge against price volatility. In March 2020, Swiss trading houses, Trafigura and Vitol, settled their first LNG derivative trade. In addition, rather than solely acting as intermediaries in the exchange of physical commodities, non-bank commodity trading firms are working more closely with governments to ensure security of energy supply and support new green value chains.
Competition intensifies between hedge funds and commodity traders – In 2022, Citadel, a non-bank commodity trading house, made record revenues of USD 16 bn, with roughly half of that coming from commodities trading. In addition, these non-bank commodities trading firms also captured a quarter of gas and power trading profits, globally, in 2022, up from less than five per cent in 2021. Having seen the record profits generated by data-centric trading firms, there is a push from non-bank commodity traders to harness AI and enhanced data processing capabilities. For instance, Trafigura opened a power trading desk three years ago, which is harnessing the huge computational power of cloud as a way of improving trading decision-making.
Banks changing interest toward commodity trading – Although banks are still involved in the commodity trading space by providing liquidity and clearing services, it is largely centred around financing infrastructure rather than physical commodity trading. Fewer banks want to be all things to all people, instead they are focusing on identifying specific segments in which they can profitably compete. Between 2021 and 2023, international banks provided USD 213 bn to support LNG expansion. Over 70% of this funding was from 30 international banks. While Japanese and US banks top the list, European banks are responsible for more than a quarter of LNG expansion support, including Santander, ING, Crédit Agricole, Deutsche Bank, HSBC, Intesa Sanpaolo and BPCE. Contrary to the overall global trend, in October 2024, JP Morgan announced it is moving into the physical trading of LNG. Global demand for LNG is surging, as many nations seek a cleaner-burning alternative to oil and coal as many countries’ governments move towards more sustainable energy sources.
Broker-dealer commodity trading flows – In order to satisfy their client-base, a global commodities broker needs to offer 24-hour trading, also known as the ‘follow the sun’ model. In addition, they need to offer their clients the ability to electronically trade and submit orders to a centralised global electronic order book. One of the main advantages of this approach to trading is that global commodities brokers can use their own inventory to fill orders. This can allow them to price improve against the market, to pass through savings to customers, or it can allow them to take that price improvement as their own additional margin.
For the sellside, efficient execution will help them to seize market share and revenues from increasingly hawkish non-bank commodity traders and trading firms.
Banks Re-shaping Commodity Markets Trading Landscape
A decade-long retrenchment of some sellside banks left opportunities for non-bank commodity traders and hedge funds to seize commodities market share. Many banks had specialised in a commodities niche, and some had sold their commodities division to a non-bank commodity trading firm. However, some are reinvigorating their commodities trading by exploring new cross-commodity trading opportunities and looking for select opportunities in certain commodity sectors. In this way, it may be possible to remain competitive with the growing number of non-bank commodity traders. Financing, however, is likely to be the main driver of revenue for banks in commodities going forward.
With many banks still reliant on the fossil fuel industry for their distribution of credit, rather than reducing in line with the ‘Net Zero’ view of the world, the Trump presidency means this business is likely to grow. Greater involvement in lucrative energy products such as liquified natural gas, suggests that banks have, indeed, renewed vigour towards this commodities space and that their involvement in the industry is not dying out, even if non-bank commodity traders are growing increasingly powerful. Nevertheless, banks continue to be an important link between the core financial system and commodities ecosystem.
