Investment bankers are having a hard time expanding their physical markets in an effort to increase the oil trading profits thanks to high fuel prices, market imbalances the likes of which have not been previously seen and tight credit conditions. Stanley  Morgan, one of the largest investment firms on the international front, has been having difficulties with trading physical items such as jet fuel and diesel.  They wound up stopping their trading on Asian fuel oil last month after only entering the market about a year ago.  The exiting of the market has nothing to do with the company’s expertise.  It has more to do with the condition the economy is currently in.

If Stanley Morgan is having difficulties, then it is apparent that other investment firms such as JP Morgan, Barclays Capital, and Merrill Lynch will not fair any better.  These companies required commitment capital-intensive storage facilities for the physical commodities as well as tankers to transport the items and special, customized back office abilities. “It’s a sign of the times when even the most experienced top-tier banks are having difficulty in getting success in an industry they already know so well,” says Ong Eng Tong, who consults on storage and trading projects in Singapore.

Stanley Morgan and Goldman Sachs were the top energy traders a little over a year ago.  When the other investment banks stepped into the market behind them, cash was cheap, the market was buoyant, and many of them were ready to challenge the two industry leaders.  These banks are now looking for ways to increase revenue sources to boost their derivatives trading desk.  Morgan has worked out a deal to supply and market products by European refiner INEOS and Barclays are now in the physical gasoline barge market trading diesel and crude oil.

All of the investment banking firms are feeling the stress of the global markets deterioration, and industrial growth in China and India has changed the supply and demand from gasoline to diesel.  This has caused residual fuel prices to drop drastically until two months ago when it suddenly resurged.  This drove up the cost of shipping and storing.  Companies that do not have an energy infrastructure to fall back on are finding that physical trading has become a challenge.  “This kind of knowledge gives you an appreciation of how to look for opportunities to make money when you trade, be it physical or the paper,” said a veteran oil trader.  “You can be more durable, if you take the time to learn the whole business or at least participate in it at some level, because if you don’t you will fall like sand.”

Investment banks are starting to shift their focus on businesses and regions that are established.  Choppy conditions are causing derivatives markets to be unstable.  While some of the banks are still attempting to continue their derivatives trading, some have thrown in the towel.  Why?  Look at the figures.  In 2002, a 30,000 ton cargo gasoline only required $8 million in credit lines.  Today the same cargo requires a $30 million letter of credit.  “If not for the credit-crisis there may have been a better chance of success for newcomers looking at entering physical trading,” Ong said.