Commodity Derivatives House: Citigroup
Ready to serve Calm returned to commodity markets in 2024, depriving trading desks of a reliable flow of client business to generate revenue. For significantly growing its client base while continuing to diversify its business across physical, hedging and financing activities, Citigroup is IFR’s Commodity Derivatives House of the Year.
2024 was a largely forgettable year for commodities. Record gold prices, a brief oil price spike and surges in niche markets like cocoa and coffee paled in comparison to the drama of 2022, when wild market gyrations accompanied the outbreak of war in Ukraine.
Preserving market share became paramount for dealers as client activity slowed and trading revenues shrank amid the calm. Citigroup proved its mettle in this testing environment, reaping the rewards of a year-long investment in commodities trading and financing while continuing to plough resources into strategic areas of growth.
The US bank increased its commodities client base by a third over the course of 2024 with the addition of 300 new clients, including with a newly resurgent hedge fund sector, helping to offset declines in the mainstay corporate business. Meanwhile, Citi continued to leverage investments across its physical trading and financing businesses that have propelled it forward in recent years.
“We’ve been investing in capabilities to offset the lower [market] volatility that we’ve had versus previous years,” said Jose Cogolludo, head of commodities. “Where we are today is a result of a plan and being clear internally [about] the kind of business that we wanted to build that made sense for Citi and the clients.”
Citi hasn’t been afraid to slash parts of its fixed-income division that weren’t profitable enough in recent years. It’s notable, therefore, that commodities trading wasn’t just left untouched, but has in fact been a target for investment.
The US bank has grown its commodities headcount by 10% since 2020 and has continued to add new products. In one landmark transaction, Citi acquired a North American gas company in 2023 to round out its physical trading operations.
Commodities has “been a long-term build for us”, said Andy Morton, head of markets. The capital-lite nature of the business makes it attractive given Citi’s laser-like focus on returns, while the global shift towards decarbonisation and renewable energy provides a powerful tailwind for these activities.
“The future, broadly, is very bright for commodities,” Morton said.
Adding gas trading means Citi now holds a physical presence across its main commodity markets, including oil, metals and agricultural products. That footprint has proved invaluable for the two other pillars of its commodities business: derivatives and financing.
Taking legal title is crucial in financing commodities so that lenders can take possession and liquidate physical holdings if need be. Physical trading also improves Citi’s ability to manage risk and the derivative hedges it can offer clients – particularly in asset classes such as power and gas where much of the liquidity resides in the physical market.
“Physical in itself is also valuable,” said Cogolludo. “Physical allows us to underpin our financing business, but also allows us to provide better, more granular risk management products to clients.”
It is hard to overstate the importance of financing in commodities markets in recent years. The energy price shock of 2022 prompted a dash for cash as companies scrambled to meet margin calls on their derivatives hedges. That played into the hands of banks like Citi that stood ready to provide financing.
A more placid backdrop in 2024 eased liquidity constraints, but financing still accounted for between 20% and 30% of Citi’s commodities revenues. As well as income from older transactions, Citi’s investments in trading and financing meant it was able to help clients in agricultural markets following price surges in cocoa and coffee.
“This [financing] concept we’ve expanded to the metals market [and] to the agricultural market,” said Yoven Moorooven, global head of commodities corporate sales and structuring. “This year, the agricultural market had a lot of volatility [in a similar situation] to 2022 on energy, and we've been able to replicate [those financing trades].”
As well as providing a more diversified and stable stream of revenues, Cogolludo said financing arrangements helped strengthen relationships with clients and opened other business opportunities. More broadly, Cogolludo said Citi has had a record year on the investor side of the business as the bank has been engaging huge amounts of new clients, including an increasingly active base of hedge fund investors.
“There’s been lower volatility so people have been less active generally … but we’ve managed to increase our capabilities in terms of new products and in terms of [onboarding new clients],” said Moorooven.
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