Goldman Sachs Group Inc. and other banks that invest in companies are officially on notice: The Federal Reserve wants that ability taken away.
Among several recommendations issued by U.S. banking regulators, one from the Fed urged Congress to prohibit merchant banking, in which firms buy stakes in companies rather than lend them money. In a report released Thursday, the agency also pushed for limits on Wall Street’s ownership of physical commodities after lawmakers accused Goldman Sachs and other banks of seizing unfair advantages in metal and energy markets in recent years.
The report — based on a multi-agency study of banks’ investment activities required by the Dodd-Frank Act — highlighted ways to fix potential risks that regulators didn’t think were handled by the law’s Volcker Rule ban on certain trading and investments. The need for Congress to pass legislation presents the greatest hurdle to the Fed’s recommendations on merchant-banking and the ability of Goldman Sachs and Morgan Stanley to operate mines, warehouse aluminum and ship oil.
“Congress has an obligation to give their recommendations serious attention,” U.S. Senator Sherrod Brown, the most senior Democrat on the Banking Committee, said in a statement.
A 2014 Senate investigation into banks’ commodities businesses revealed Goldman Sachs had almost $15 billion in merchant banking investments. The firm’s most recent filings show it booked $1.2 billion in revenue through the first six months of this year in its division that houses merchant banking, with equity investments contributing $626 million of that.
Another agency that participated in issuing the report, the Office of the Comptroller of the Currency, said it plans to restrict lenders’ holdings of the hard-to-value securities. The OCC also proposed a rule Thursday that would curtail banks’ investments in certain industrial metals including copper and aluminum.
The Fed called for the repeal of exemptions for industrial loan companies, which are lenders generally owned by non-financial firms, that allow them to operate outside of rules that affect banks. The Fed’s section of the report said its aim was to level the playing field among financial firms and “help ensure the separation of banking and commerce.”
Spokesmen for Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. — another bank that could be affected by the recommendations — declined to comment on the regulators’ report.
A coalition of financial industry associations called the recommendations “unfortunate and ill-considered” in a statement. The groups — including the Clearing House Association, American Bankers Association and Securities Industry and Financial Markets Association — said merchant banking has financed startups and fueled job growth. The groups also argued that it hasn’t been shown to pose a risk to the financial system.
The Fed and the U.S. Treasury Department adopted a merchant-banking rule in 2001 after the 1999 Gramm-Leach-Bliley Act gave banks the right to make such investments. But making statutory changes to merchant banking and other industry laws would require intervention from lawmakers — a tall order in a politically-divided Congress that has passed only a few significant bills affecting the financial system in recent years. That leaves any immediate impact of the report in doubt.
The Fed, OCC and the Federal Deposit Insurance Corp. were required by Dodd-Frank to dig into further risks from bank investments, and they were supposed to issue the report almost five years ago.
The document was called for by a provision tucked more than 200 pages into Dodd-Frank under section 620. Lenders’ government watchdogs had to review the industry’s investment activities to determine whether they “could have a negative effect on the safety and soundness” of the financial system. But the mandate was easy to lose track of next to the passage that preceded it: section 619, which is better known as the Volcker Rule.
Goldman Sachs, Morgan Stanley and JPMorgan were the targets of criticism that led to the 2014 Senate review of their commodities businesses. It found lenders used their ownership of metals and other physical commodities to dominate markets and gain unfair trading advantages. The physical commodities businesses at Goldman Sachs and Morgan Stanley were protected by grandfathering that allowed them wider abilities than most banks — an advantage the Fed is seeking to end.
Morgan Stanley sold off its oil business last year and backed away from industrial metals trading, while JPMorgan shed a big part of its physical commodities business in 2014. While Goldman Sachs dumped a coal-mining operation in 2015, Chief Executive Officer Lloyd Blankfein has maintained that commodities trading is a “core” part of his firm’s business.
Oil Prices Decline on Rising India COVID-19 Cases, U.S Inflation Concerns
Global oil prices extended a decline on Friday following a 3 percent drop on Thursday as coronavirus cases rose in India, one of the world’s largest oil consumers.
Brent crude oil, against which Nigerian oil is priced, declined by 35 cents or 0.5 percent to $66.70 a barrel at 5 am Nigerian time on Tuesday while the U.S West Texas Intermediate (WTI) fell by 28 cents or 0.4 percent to $63.54 per barrel.
“The commodity super cycle rally just hit a hard stop and the energy market doesn’t know what to make of Wall Street’s fixation over inflation and the slow flattening of the curve in India,” said Edward Moya, senior market analyst at OANDA.
“The crude demand story is still upbeat for the second half of the year and that should prevent any significant dips in oil prices,” he added.
Prices dropped over a series of key economic data that stoke inflation concerns and forced experts to start thinking the Federal Reserve could raise interest rates to curb the surge in inflation.
An increase in interest rates typically boosts the U.S. dollar, which in turn pressures oil prices because it makes crude oil more expensive for holders of other currencies.
This coupled with the fact that India, the world’s third-largest oil consumer, recorded more than 4,000 COVID-19 deaths for a second straight day on Thursday, dragged on the oil outlook in the near term.
Brent Crude Rises to $69 on IEA Report
Oil prices rose after the release of the International Energy Agency’s (IEA) closely-watched Oil Market Report, with WTI Crude trading at above $66 a barrel and Brent Crude surpassing the $69 per barrel mark.
Prices jumped even though the agency revised down its full-year 2021 oil demand growth forecast by 270,000 barrels per day (bpd) from last month’s assessment, expecting now demand to rise by 5.4 million bpd. The downward revision was due to weaker consumption in Europe and North America in the first quarter and expectations of 630,000 bpd lower demand in the second quarter due to India’s COVID crisis.
The excess oil inventories of the past year have been all but depleted, and a strong demand rebound in the second half this year could lead to even steeper stock draws, the IEA said yesterday, keeping an upbeat forecast of global oil demand despite the weaker-than-expected first half of 2021.
However, the upbeat outlook for the second half of the year remains unchanged, as vaccination campaigns expand and the pandemic largely comes under control, the IEA said.
Moreover, the global oil glut that was hanging over the market for more than a year is now gone, the agency said.
“After nearly a year of robust supply restraint from OPEC+, bloated world oil inventories that built up during last year’s COVID-19 demand shock have returned to more normal levels,” the IEA said in its report.
In March, industry stocks in the developed economies fell by 25 million barrels to 2.951 billion barrels, reducing the overhang versus the five-year average to only 1.7 million barrels, and stocks continued to fall in April.
“Draws had been almost inevitable as easing mobility restrictions in the United States and Europe, robust industrial activity and coronavirus vaccinations set the stage for a steady rebound in fuel demand while OPEC+ pumped far below the call on its crude,” the IEA said.
The market looks oversupplied in May, but stock draws are set to resume as early as June and accelerate later this year. Under the current OPEC+ policy, oil supply will not catch up fast enough, with a jump in demand expected in the second half, according to the IEA. As vaccination rates rise and mobility restrictions ease, global oil demand is set to soar from 93.1 million bpd in the first quarter of 2021 to 99.6 million bpd by the end of the year.
OPEC Expects Increase In Global Oil Demand Raises Members’ Forecast on Crude Supply
The Organisation of Petroleum Exporting Countries (OPEC) yesterday lifted its forecast on its members’ crude this year by over 200,000 bpd and now expects demand for its own crude to average 27.65mn bpd in 2021.
This is almost 5.2mn bpd higher than last year and around 2.7mn b/d higher than an earlier estimate of the group’s April production.
According to the highlights of the organisation’s latest Monthly Oil Market Report (MOMR), OPEC crude is projected to rise from 26.48 million bpd in the second quarter to 28.7 million bpd in the third and 29.54 million bpd in the fourth quarter of the year.
The report also indicated a fall in Nigeria’s crude production from 1.477 bpd in February to 1.473, a difference of just about 4,000 bpd before rising again in April to 1.548 million bpd, to add 75,000 bpd last month.
OPEC stated that its upward revision of members’ crude was underpinned by a downgrade in the group’s forecast for non-OPEC supply, which it now expects to grow by 700,000 bpd to 63.6mn b/d against last month’s report’s projection of a 930,000 bpd rise to 63.83mn bpd.
The oil cartel projected that US crude output would drop by 280,000 bpd this year, compared with its previous forecast for a 70,000 bpd decline.
On the demand side, OPEC kept its overall forecast unchanged from last month’s MOMR, stressing that it expects global oil demand to grow by 5.95 million bpd to 96.46 million bpd this year, partly reversing last year’s 9.48mn bpd drop.
Spot crude prices fell in April for the first time in six months, with North Sea Dated and WTI easing month-on-month by 1.7 percent and 1 percent, respectively.
On the global economic projections, the cartel said stimulus measures in the US and accelerating recovery in Asian economies might continue supporting the global economic growth forecast for 2021, now revised up by 0.1 percent to reach 5.5 percent year-on-year.
This comes after a 3.5 percent year-on-year contraction estimated for the global economy in 2020.
However, global economic growth for 2021 remains clouded by uncertainties including, but not limited to the spread of COVID-19 variants and the speed of the global vaccine rollout, OPEC stated.
“World oil demand is assumed to have dropped by 9.5 mb/d in 2020, unchanged from last month’s assessment, now estimated to have reached 90.5 mb/d for the year. For 2021, world oil demand is expected to increase by 6.0 mb/d, unchanged from last month’s estimate, to average 96.5 mb/d,” it said.
The report listed the main drivers for supply growth in 2021 to be Canada, Brazil, China, and Norway, while US liquid supply is expected to decline by 0.1 mb/d year-on-year.
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