Traders across Wall Street are poised for significant profits from the freeze that roiled energy markets and left swaths of the U.S. without electricity last month. That is, if they can collect.
Goldman Sachs could gain more than $200 million from the physical sale of power and natural gas and from financial hedges after spot prices surged across much of the U.S., according to people with knowledge of the matter. Morgan Stanley’s gains could come in under $200 million, according to a person with familiar with the matter, and Bank of America Corp. stands to rake in profits as well.
But those gains in their totality may prove elusive given the crisis’s fallout — tipping energy companies into bankruptcy, triggering legal challenges and prompting government intervention. The uncertainty is such that Goldman executives estimate that the bank may realize less than half of its paper gains, the people said, asking not to be identified as the information isn’t public.
The full extent of the profits is also likely to be hampered at Morgan Stanley and Bank of America, where offsets from other investments and unprecedented actions from regulators would likely curtail the windfall.
The historic cold that battered the central U.S. last month led to sweeping blackouts as ice formed on wind turbines and pipelines froze, forcing oil and gas wells to shut. As traders and power suppliers struggled to find fuel to meet obligations, prices skyrocketed. In Oklahoma, gas traded at more than 300 times normal levels, while electricity in Texas surged to $9,000 per megawatt-hour.
“The polar vortex drove volatility in energy markets, and, as a market-maker and liquidity provider, we were positioned to help our clients manage their risks in that challenging environment,” Maeve DuVally, a Goldman Sachs spokeswoman, said in a statement.
Bank of America also gained hundreds of millions of dollars in trading revenue due to the winter storm, the Financial Times reported Friday. The bank said in a statement that any revenue will be offset by losses and reduced revenues from investments in wind and other alternate power suppliers in Texas, as well as other affected markets.
Mark Lake, a Morgan Stanley spokesman, declined to comment.
The price swings benefited companies including Macquarie Group, the second-biggest physical gas supplier in the U.S. The Sydney-based investment bank raised its profit forecast last month, implying a windfall of as much as $210 million, as it cited increased demand for gas- and power-supply services. Pipeline operators Energy Transfer LP and Oneok Inc. also said they gained.
Still, the cash that companies actually collect will ultimately depend on what happens to the gas suppliers, power generators, utility customers and traders who were stung by the soaring energy prices. Some are facing default. Others are going bankrupt. And state lawmakers are looking into forgiving some payments for consumers altogether.
Several traders described the potential for a daisy chain, in which payments aren’t made to sellers in one market, affecting payments elsewhere. It was a surprise to some that Macquarie updated its forecast so soon.
“People are waiting for checks that aren’t coming,” said Evan Caron, chief strategy officer of energy-technology firm ClearTrace.
The final outcome depends in part on developments in places such as Texas.
That market’s manager, the Electric Reliability Council of Texas, is grappling with a $2.5 billion shortfall as more than a dozen companies face default. In a further complication, an independent monitor told state regulators that Ercot incorrectly priced electricity during the emergency, resulting in $16 billion in overcharges. If that were reversed, the adjustment would cut profits expected by some of the market’s biggest winners. Meanwhile, in the statehouse, discussion of a potential bailout or other intervention continues.
Some of Goldman’s gains resulted from hedges, a routine part of risk management on Wall Street and across corporate America. Hedges are typically supposed to blunt losses in the event that prices swing unexpectedly. The protection can become highly profitable when rare events occur.
Catastrophes can leave companies that hedged holding windfalls while others incur heavy losses. Yet there is still the risk that counterparties are left too weak to pay up.