RPT-Morgan Stanley puts physical fuel oil trade on hold

(Repeat of story published late on Tuesday)

By Luke Pachymuthu

SINGAPORE, Aug 5 (Reuters) - Morgan Stanley (MS.N) has put its Asian fuel oil trading business on hold just a year after entering the market, highlighting the challenge for banks expanding into physical trade, industry sources said on Tuesday.

The U.S. investment bank has relinquished its lease on a floating storage facility and the leader of its fuel oil trading desk is on extended leave, said industry sources familiar with the matter.

Morgan Stanley and Goldman Sachs (GS.N) has dominated global energy derivatives trading for decades. Morgan is the only investment bank to have developed a long-standing successful niche in the physical oil market with its middle distillates trading book.

But its expansion into the Asian fuel oil market came at a turbulent time for the product, with outright prices on the benchmark utility grade having jumped nearly 55 percent since the start of the year, with differentials hitting a low of minus $7 a tonne and a high of around plus $6.

A spokesman for the Wall Street bank declined to comment.

Activity for its fuel oil business in Europe and the United States will not be affected, an industry source familiar with the matter said.

Morgan Stanley gave up its floating storage unit (FSU) the Titan Chios in Asia at the end of June following the expiry of its lease, the first signal that its foray into the market may not have been as successful as it had hoped, traders said.

At the time Morgan Stanley said that it was likely to continue with its fuel oil trading business, but industry sources said that its chief fuel oil trader Alan Kendall is currently on extended leave.

Morgan Stanley said in June that its failed bets on energy trading hurt its second-quarter revenues, contributing to a more than 50 percent drop in its second-quarter earnings despite a pretax gain of $1.43 billion from assest sales. [ID:nN18450634]

Investment banks from JP Morgan (JPM.N) to Barclays Capital (BARC.L) have said they intended to enter the physical oil market to support trading profits and offer better hedging tools, but most forays have been limited so far.

French bank BNP Paribas (BNPP.PA) recently shut its Asian oil derivatives trading desk in Singapore and relocated its three-men team to London. Dutch-Belgian bank Fortis (FOR.AS), which brought at least two traders on board last year in Singapore with plans to open a derivatives desk shelved the idea, relocating the traders to Houston.

Morgan Stanley has for years run a large business buying, selling, transporting and storing jet fuel and gas oil, making it one of the largest importers into the United States.

It also recently struck a deal to provide crude oil, marketing of refined products globally and offer risk management services for INEOS Refining, an independent refining group.

The banks' commodities group will provide the services to support INEOS's refinery operations in Grangemouth, Scotland and Lavera in France.

Morgan Stanley is also tipped as the frontrunner to buy an oil storage terminal in Freeport in the Bahamas. [ID:nN16225638]. (Reporting by Luke Pachymuthu; Editing by Ramthan Hussain)