By Matthew Robinson and Scott DiSavino
NEW YORK, June 7 The hard core of Morgan
Stanley's commodities trading empire, once the mightiest on Wall
Street famed for its powerful union of paper and physical deals,
Even as the bank is reported to be considering selling a
stake in its billion-dollar commodities unit, its physical
trading activity in key U.S. markets is contracting in the face
of abruptly changing market dynamics as well as diminishing risk
appetite due to growing regulations and capital constraints.
In the power markets, it is trading only one-fifth as much
electricity as five years ago. In oil, its imports to the United
States fell last year to the lowest since 2004, while rising
exports offered partial compensation. It barely makes the top
100 list of natural gas traders, with activity down from 2010.
Even the bank's prized subsidiary TransMontaigne, a
Denver-based refined petroleum products supply and distribution
company it bought for $630 million six years ago, hasn't helped
it cash in on the boom in domestic U.S. crude oil trading this
year. Its 2011 revenues were $152 million, up just 16 percent
The data, based on government figures, port intelligence,
securities filings and market sources, casts in sharp relief a
trend that commodity traders say has been apparent for some
time: Morgan Stanley is losing its edge in the opaque,
over-the-counter cash commodity markets it once ruled.
"The regulatory strictures and capital requirements are
leading many banks, I'd imagine, to look at their commodities
business and wonder if it's still worthwhile," said Dr. Sharon
Brown-Hruksa, vice president at Nera Economic Consulting and a
former acting chairman of the CFTC.
"The passage of Volcker, position limits and capital
requirements may make it difficult to maintain the commodities
business. Energy trading, especially with physical assets, can
be very capital intensive."
While its commodity trading revenues have fallen by nearly
60 percent since an estimated peak of over $3 billion in 2008,
many analysts and traders say the group is far too important for
the bank to part with in whole.
But facing a potential credit downgrade by Moody's this
month and heightened restrictions on proprietary trading, the
bank has explored a partial sale in the commodities trading
division, CNBC reported on Wednesday.
The challenges ahead may hit Morgan Stanley harder than its
peers who trade more in derivatives markets. The proposed
Volcker Rule would limit the ability of federally protected
banking institutions from using their own money to trade in the
markets, possibly preventing Morgan Stanley from taking risks it
says are necessary to succeed in illiquid cash markets.
A Morgan Stanley spokeswoman declined any immediate comment
on its trading activities.
Along with arch rival Goldman Sachs, Morgan Stanley
was one of the original "Wall Street refiners" that broke into
the energy derivatives market three decades ago. Oil trading is
still estimated to make up about half its commodities business.
But while Goldman and many rivals have shifted their focus
more squarely to client "flow" business - market-making with
funds, selling indices to investors or hedging corporate risks -
Morgan has remained resolutely a merchant-trader, focusing on
the business of storing or transporting raw materials.
The more traditional client trade only makes up about 10 to
15 percent of its commodities unit, according to a Nomura
research report in March 2008 after a conversation with Colin
Bryce, who runs the division together with Simon Greenshields.
The rest is the merchanting business that has "higher barriers
to entry...and requires more expertise".
In the early 1990s, Morgan Stanley oil trader Olav Refvik
earned the moniker "King of New York Harbor" by securing a host
of leases on storage tanks at the key import hub, giving the
company an enviable position in the market. Refvik left Morgan
in 2008 and now works for commodity trader Noble.
In recent years, the bank held great sway over the
trans-Atlantic gasoline trading, importing the fuel along the
East Coast from New England to Florida.
The bank still has sizeable leases, including a host of
terminaling agreements with TransMontaigne. However the value of
its future rental commitments for vessel charters and oil
storage leases has fallen by a third since 2007, reach just
below $960 million as of 2011, according to SEC filings.
Meanwhile oil market dynamics have upended one of its most
substantial trading positions -- imports of refined fuels,
especially diesel, gasoil and jet fuel, to the East Coast, where
shrinking demand has resulted in excess refining capacity. Total
East Coast imports have dropped by a third in four years.
In total, the bank imported some 96,000 barrels per day
(bpd) of crude and oil products to the United States last year,
down 28 percent from 2010 and the first time that its shipments
have fallen below 100,000 bpd since 2004, according to company
level import data from the Energy Information Administration.
In 2005, when U.S. gasoline shipments by the bank peaked, it
imported nearly 55,000 bpd of gasoline, accounting for just over
9 percent of the U.S. total 603,000 bpd, the data show.
Its business has since shifted in favor of blending
components, which made up more than 80 percent of its shipments
last year. Import of distillate fuels like diesel and heating
oil, once a mainstay, thinned to a trickle last year.
The domestic surplus has reversed the flow of fuel, creating
an export boom -- one that Morgan Stanley has failed to exploit
to the fullest extent.
The bank's exports of refined fuels, a third of which is
thinly-traded gasoline blending component Methyl Tertiary Butyl
Ether (MTBE), have doubled in the past three years, but still
amount to a modest 50,000 bpd, according to a Reuters analysis
of data from shipping intelligence firm PIERS.
Like rivals, the bank has also built up its Canadian crude
oil trading business, banking on a surge in output. Market
sources say it has leased highly strategic tank capacity at the
Hardisty, Alberta, storage hub, where crude from the oil sands
is stored before being shipped to U.S. markets.
"Because they have assets both upstream and down, they are
positioned well to trade, and with perhaps less risk," a
Canadian crude trade source said.
But thus far it has yielded only minor success in terms of
export trade. The Energy Department data show nearly four
million barrels exported to the United States over the past
decade, all of that during May and June of last year and all
destined for a 170,000 bpd refinery in Toledo, Ohio.
That deal may have been aided by Morgan Stanley's agreement
with independent refiner PBF Energy, which owns the Toledo
plants as well as two in Delaware and New Jersey, to market the
company's fuels. It is unclear when that deal expires, however.
Another piece in Morgan Stanley's trading arsenal has been
recently removed. Earlier this year, PetroChina ended a 5-year
with Morgan Stanley for crude supply and fuel market at two
refineries in France and Scotland, sources have said.
The bank's trading in power and gas markets, which make up
an estimated 40 percent of its business, has also shrunk.
In 2007, Morgan Stanley's total U.S. power market
transactions averaged about $3.1 billion per quarter, according
to a Reuters review of Federal Energy Regulatory Commission
reports. But by the first quarter of this year it had slumped to
about $570 million, the lowest in at least five years.
Other banks too have pulled back. Goldman Sachs' trading
volumes have fallen from $1.3 billion to $134 million over the
same five-year period, the FERC data show.
Electricity traders said some banks, including Morgan
Stanley, were reducing their exposure to the power market, in
part due to the Dodd-Frank regulations.
"Price moves have certainly been less over the past few
years and a reduction in risk taking has definitely taken
place," said one U.S. power trader. "(Dodd Frank) will only make
it less liquid going forward."
While Morgan Stanley hasn't suffered as noticeable an exodus
of senior traders as some rivals, including Barclays and JP
Morgan, some say it seems only a matter of time before traders
head to hedge funds and other private equity firms.
"The best traders are already on the move," said one power
trader. "I hear others questioning why they're still there."
Morgan Stanley owns and operates electric power plants with
more than 500-megawatt's of capacity in the United States,
including Naniwa, a 380-megawatt power plant in Nevada, and two
100-megawatt plants in Georgia and Alabama.
Morgan Stanley ranked 89th among U.S. natural gas traders
with total purchase and sales of 240.7 trillion British thermal
units last year, down 13 percent from 2010 even as total market
activity grew marginally, according to a Natural Gas
Intelligence analysis of FERC's 552 filings data, verified by
Reuters. Morgan Stanley's volumes are similar to 2008 and 2009.
Even the bank's strong position in the market for liquefied
natural gas (LNG) may now be challenged as the dynamics of
global trade change.
Morgan Stanley opened a commanding lead over other banks by
jumping into the cliquey market in 2008, led by a team of four
traders who work primarily in the Atlantic Basin.
It has two LNG ships on charter -- the Arctic Spirit and the
Excel -- and is in talks to secure a third, according to one
source with direct knowledge of operations. Last year it traded
21 cargoes of LNG, or roughly 65 billion cubic feet of gas, and
has traded another 13 cargoes this year, the source said.
In February, it re-exported a cargo from the Sabine Pass
terminal in the United States to Japan, where demand has
rocketed following the lay-off of most of its nuclear plants. It
has a deal to supply cargoes to Argentina, and also has
short-term offtake deals from Trinidad and Nigeria.
"In moving volumes of LNG, Morgan Stanley has been the main
bank," said Andres Rojas, analyst at Waterborne LNG in Houston.
But that market is now changing dramatically, with other
banks and financial players -- such as JP Morgan and energy
trader Gunvor -- now vying for a share of the small, competitive
In addition, the United States is poised to become an LNG
exporter, and Morgan Stanley has yet to get a foothold in the
market while others such as JP Morgan and Macquarie may be
involved in U.S. liquefaction projects.