SINGAPORE Energy trading heavyweight Morgan Stanley withdrew from a half-hour oil trading window in Asia on Thursday, two industry sources said as credit risk hit liquidity in cash energy markets.
Morgan's withdrawal came after energy price benchmarking agency Platts placed it under review because of counterparty concerns about its credit status, the sources, who declined to be identified, said.
The Platts review does not stop Morgan Stanley trading oil, but means that its bids and offers will not be taken into account during the daily half-hour "window" during which Platts assesses prices in over-the-counter oil markets.
"Counterparty acceptance is a huge problem right now in commodity markets too," said Jorge Montepeque, Platts' global director of market reporting, at a conference in London.
"We have situations where entities in the oil industry will not trade with a bank."
Montepeque declined to comment on Morgan Stanley. A spokesman for Morgan Stanley in London also declined comment.
Rather than risk a possible public test of its credit acceptance among counterparties in an increasingly anxious oil market, Morgan Stanley asked its brokers in Singapore not to put prices into the Platts system, three brokers with different companies told Reuters.
But Morgan Stanley, one of the two biggest oil derivatives traders, continued to participate in over-the-counter markets through the day and there was no suggestion that it was withdrawing from OTC trade.
Being blocked from the window will reduce the bank's influence on Platts prices, the benchmark for physical OTC trade across world oil markets.
The move by Platts, a unit of McGraw-Hill Companies Inc, comes at a time of escalating concerns over counterparty risk across commodity markets as the credit crisis claims once-mighty financial institutions.
Unlike the futures markets, in which all trades are backed by a clearing house, cash and over-the-counter energy trade is usually bilateral.
"Clearly there's massive focus on counterparty credit risk," a director at a bank in New York said.
"We have not had any issue with clients pulling away, but a lot of people are clearing deals as opposed to doing bilateral deals."
Trading activity was also affected in other energy markets because of credit concerns.
Liquidity in two benchmark European coal swaps markets fell by up to 75 percent on Wednesday and Thursday as credit lines to swaps traders at banks were reduced, traders said.
Coal swaps traders, which include utilities, banks, physical coal traders and hedge funds, are moving to trade the IntercontinentalExchange's cleared swaps as they are seen as less risky, they said.
Morgan Stanley was in deal talks with U.S. regional banking powerhouse Wachovia Corp, and negotiations advanced to a more formal stage, a source familiar with Morgan's plan said on Thursday.
"There are many counterparties who have issues with Morgan Stanley now," said one of the sources familiar with the review, who declined to be named because the information isn't public.
A second industry source said Morgan Stanley had been informed of the review this week.
Traders at five companies in Asia and Europe said their companies were taking a more cautious view of exposure to the bank.
One trade source with a Western company said he had been told to use ClearPort, a clearing platform backed by the CME's New York Mercantile Exchange (NYMEX) that allows traders to eliminate counterparty risk, for all trades involving Morgan Stanley.
A shake-up at Morgan Stanley would have wider reverberations for the world oil market than anything up to this point.
Bear Stearns and Lehman Brothers were lesser players in the oil market. Merrill Lynch, bought by Bank of America, may continue its operations in U.S. and European oil, gas and power trade.
Morgan Stanley and Goldman Sachs have dominated energy derivatives trade for many years and Morgan Stanley plays a big role in moving physical oil supplies around the world. It is one of the biggest importers of jet fuel and gas oil into the United States and runs a physical distillate book.
It is not uncommon for Platts to put a company under "review" for anything from violating the rules of trade to delivering off-specification product after a trade, essentially a punitive measure known in the industry as "boxing".
But it is less common for Platts to do so because of credit concerns, since these are more difficult to assess.
Platts placed Lehman Brothers, which has a much smaller energy trading operation, under review in early July, about two months before the bank collapsed.
Platts competes with Thomson Reuters in providing news and information to the energy markets.
(Reporting by Luke Pachymuthu, Felicia Loo and Baizhen Chua; additional reporting by Alex Lawler, Jane Merriman, Nao Nakanishi and Jacqueline Cowhig in London, and Joseph Silha in New York, Editing by Jonathan Leff, Richard Mably)