Goldman Sachs and Morgan Stanley are the big beneficiaries of increased interest in energy commodity hedging, according to new research from Greenwich Associates.

As the prices of energy and other commodities soar to historic highs, companies around the world are making the hedging of their energy commodities exposures a top strategic priority, it found. “Although the ongoing commodities boom is creating new opportunities for dealers across the board, the firms benefiting most are the handful of dealers that have historically dominated the market,” it said.

“The spike in commodities prices has had a profound impact on businesses around the world and many companies are moving to protect themselves by using financial instruments to hedge their exposures,” says Greenwich Associates consultant Andrew Awad. “Because changes in commodity prices can have a dramatic impact on some companies’ P&L, companies are increasingly placing a strategic focus on hedging and are looking for proven expertise. As a result, many are choosing to work with the derivatives dealers that have the most credibility and the largest franchises.”

In particular, this favours Goldman Sachs and Morgan Stanley, the two firms cited most frequently by companies in Asia, Europe and the US as active OTC derivatives trading relationships, Greenwich said. “In addition to their proven commitment to this business, Goldman Sachs and Morgan Stanley also benefit from their reputations as providing superior service quality,” says Greenwich Associates consultant Woody Canaday.
“These two firms tie for first place on the Greenwich Quality Index, which aggregates quality ratings awarded by actual clients of all the major dealers.”

The two firms that together constitute the next tier of dealers — Barclays Capital and JPMorgan — also maintain significant OTC derivatives franchises among global corporate energy users, it added. Other firms ranking among the world’s leading dealers in terms of franchise size are BP, Citigroup, Deutsche Bank, and Société Générale. “Of all these competitors, Barclays Capital is the only firm besides the two market leaders that has built a significant client base in each of the world’s major regional markets,” says Greenwich Associates consultant Frank Feenstra.

Awad adds, “Even though commodities markets continue to surge, commodity derivatives dealers looking to build out their franchises face an uphill struggle. Because the potential impact of volatility in commodities prices on a company’s bottom line is so large, companies are less willing to take a chance with a firm that has anything less than a long established, blue-chip reputation in OTC derivatives trading. The fact that firms like Goldman Sachs and Morgan Stanley have demonstrated an historic commitment to trading these products while some other competitors have come in and out of the market gives them tremendous credibility with corporate decision makers. It also helps that these firms have had physical capabilities in energy commodities for quite some time.”