By Cezary Podkul
NEW YORK Nov 7 As the tiny niche market for
ethanol credits turned into this year's hottest commodity, the
spike in prices didn't do much for the so-called Wall Street
The biggest commodity traders in the financial world have
either steered clear of the opaque market for the credits or
ended up on the wrong side of a rally that saw prices surge as
much as 2,900 percent in recent months, according to other
market participants and bank officials.
Despite attracting public scrutiny over their role trading
the renewable identification numbers (RINs) that were blamed
this summer for adding extra pennies to U.S. gasoline prices,
the banks have mostly played only a small part in the market,
the sources said.
Morgan Stanley Inc, the biggest physical gasoline and
diesel trader on Wall Street due to its import and terminal
business, has ended up short of the credits this year, forcing
it to buy extra to meet its obligations, a spokesman said.
JPMorgan Chase & Co needs to collect the credits to
cover a small gasoline-component blending contract in Texas. It
is also responsible for making up any shortfall in RINs at a
large Philadelphia refinery as part of a supply deal.
Goldman Sachs Inc, which is not a major oil products
trader, doesn't trade the credits at all, according to sources
familiar with the matter.
The banks' limited engagement with a seemingly attractive
market highlights the pullback in riskier dealing because of new
U.S. regulations. It also shows wariness on Wall Street of
anything that may draw further scrutiny from Washington, where
banks have been blamed for spikes in food or fuel prices.
In recent months, members of the House and Senate have
called on U.S. derivatives regulators to look into potential
manipulation of the market for the credits. And refiners have
pegged high gasoline prices to the surging price of the credits,
which they say have added nearly $2 billion to their costs this
Federal rules require refiners and importers of fuel
products to collect RINs to show compliance with a 2007 law
mandating the blending of biofuels like ethanol into the
nation's gasoline supply. The 38-digit number tracks each gallon
of biofuel from the factory to the gas tank. If a refiner
doesn't buy and blend enough ethanol, the company must buy RIN
credits in the open market to make up the shortfall.
To gauge the banks' foothold in the RIN market, Reuters
analyzed gasoline import data, refinery contracts and compliance
data, and interviewed traders active in the market. None of the
three banks own refineries, and with the exception of Morgan
Stanley - a sizeable importer and blender of gasoline - none
have had much of a reason to be active players in the market.
EPA rules allow anyone to register to buy RINs purely for
speculative purposes, not for compliance. Some proprietary
traders, such as Chicago-based DRW Trading, show up on a
compliance registry kept by the U.S. Environmental Protection
Agency. A spokesman for DRW would neither confirm nor deny that
it is still active in the market.
But outfits that have done the best trading in credits have
had a reason to be actively involved in the market.
Oil major BP Plc said it found itself with credits to
spare and traded them for a profit earlier in the year. Swiss
trading house Vitol SA, a major gasoline importer, is also said
to have done well trading the credits, which spiked from about 5
cents in December to almost $1.45 in mid-July. They traded for
about 30 cents each on Wednesday.
Traders say Morgan Stanley has been a regular participant in
the RIN market this year. The firm owns a fuel marketing
subsidiary, Denver-based TransMontaigne Inc, which can
blend ethanol and gasoline together at five or more terminals.
That gives Morgan Stanley a steady supply of the credits.
However, Morgan Stanley is also a heavy importer of
gasoline, data from the U.S. Energy Information Administration
(EIA) show. The bank has imported more than one billion gallons
of gasoline in each of the last three years and is on target to
come close to that amount in 2013, according to the data. That
puts Morgan on the hook to collect at least 100 million RIN
credits a year to show compliance with the 2007 fuel blending
Until June, Morgan Stanley also managed supply and gasoline
marketing for a large East Coast refiner, PBF Energy.
Morgan Stanley blended gasoline from two of PBF's refineries
with ethanol for resale. Morgan Stanley said it passed all
RINs it collected from the wholesaling of gasoline at PBF's
terminals back to PBF. For the gasoline bought in bulk and sold
in bulk it collected no RINs.
Asked about its net position last month, a spokesman for
Morgan Stanley said the bank has come up short of the credits
this year and has been in the market buying more to satisfy its
As a result, "Morgan Stanley has not benefited from the
increase in price," the spokesman said.
GOLDMAN'S HANDS-OFF APPROACH
Rival bank Goldman Sachs says it has not bought the credits
at all, either for its own book or for clients.
In July, the bank took over the PBF contract formerly run by
Morgan Stanley and has similar arrangements in place with four
refineries run by Dallas-based Alon USA Energy Inc. A
Goldman spokesman said the bank is not obliged to collect RINs
as part of the contracts or to cover PBF or Alon in case the
refiners fall short on their obligations.
The EPA compliance database also shows 31 fuel blending and
other facilities registered in the name of Goldman's commodities
trading arm, J. Aron & Co. Goldman said it has not used the
facilities since at least 2008, when it became a bank holding
company in the midst of the financial crisis.
Nor does J. Aron import any gasoline, EIA data show, which
leaves it free of the compliance obligations Morgan Stanley
faces because of its hefty import tab.
JPMORGAN'S CUSTODIAL ACCOUNT
JPMorgan also appears to have little in the way of physical
gasoline import activities that would give it a meaningful role
in the RIN markets.
The last time the bank imported gasoline was in 2012, when
it brought about 22 million gallons into the United States,
versus about 8 million in 2011, EIA data show.
The bank does have a contract to blend gasoline components
into finished gasoline at a terminal near Houston, according to
people familiar with the matter. Similar to a refiner that
manufactures finished fuel products, the gasoline blending
forces JPMorgan to collect RIN credits to show compliance with
the EPA's biofuel blending rules.
It is not known how many credits that is. JPMorgan spokesman
Brian Marchiony said the bank's ethanol RIN inventory was less
than 0.001 percent of an estimated 14 billion market for the
credits, which means it would need to collect less than 14
In September, the New York Times reported that the bank had
stockpiled the credits ahead of their spike in prices. Marchiony
said in response to the article that "we simply do not trade
RINs, nor do we carry an inventory other than a marginal amount
for compliance purposes."
JPMorgan does, however, finance the oil supply for a large
U.S. refiner, Philadelphia Energy Solutions. The bank buys the
oil for the company's 350,000 barrels-per-day Philadelphia
plants and gets repaid by selling the gasoline output - an
"activity we could not survive without," PES Chief Executive
Philip Rinaldi previously told Reuters.
JPMorgan bought RINs for PES for several weeks in September
and October of 2012 when it first picked up the refinery
contract, according to a person familiar with the bank. Since
then the refinery has managed its own RIN purchases.
As part of its arrangement with the refinery, JPMorgan acts
as a custodian for the RIN credits. That means the bank oversees
the purchases to make sure PES doesn't fall short of its
obligations, according to the source.
Were it to do so, JPMorgan would have to make up the