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December 20, 2013 8:10 pm
Morgan Stanley has taken the first step towards dismantling its once-mighty commodities division with the sale of the US bank’s global oil trading business to Rosneft, the Russian state-controlled energy group.
The bank was one of the original duopoly that dominated commodities on Wall Street, along with Goldman Sachs. But the business has struggled under both regulatory and financial pressures as Morgan Stanley aims to reduce risks.
A Rosneft subsidiary will buy Morgan Stanley’s global oil merchant unit for an undisclosed sum, the bank said on Friday. The sale will include an international network of oil tank storage contracts, inventories, supply agreements and freight shipping contracts as well as the bank’s 49 per cent stake in Heidmar, a manager of oil tankers.
The transaction would need approvals from the Committee on Foreign Investment in the United States, which can block sales of US assets on national security grounds.
However, Morgan Stanley is not selling Rosneft some of its more sensitive US commodity assets including TransMontaigne, which distributes about 300,000 barrels of fuel per day across the US southeast. The bank said it was separately exploring strategic options for its stake in TransMontaigne.
Commodities businesses including gas and electricity trading, and Morgan Stanley’s stakes in power plants, will not be part of the sale.
Morgan Stanley has long been the most active bank in physical oil markets, building up the business since the early 1980s. But during the financial crisis the investment bank came under the oversight of the Federal Reserve, which has taken a sceptical view of such enterprises.
The relatively small scope of the sale leaves a question over the remainder of Morgan Stanley’s physical commodities business, which it has been trying to sell for two years, including protracted and ultimately failed negotiations with Qatar’s sovereign wealth fund. JPMorgan Chase is also trying to sell a rival business.
There has been no specific directive from the Fed that Morgan Stanley and Goldman Sachs should sell their physical commodity assets, according to people familiar with the matter.
But the two banks have taken different views of the Fed’s ultimate position, with Morgan Stanley believing the regulatory atmosphere militates against them retaining the business.
Morgan Stanley has been more driven to reduce risk than Goldman and this transaction will have a modest positive impact on its capital levels because it reduces risk-weighted assets.
Rosneft already has an oil trading business in Geneva, supplying its refineries in Europe. However, the Morgan Stanley deal will put the state-run oil company in competition with traders Glencore and Vitol and some of the world’s leading energy companies.
Former Morgan Stanley chief executive John Mack sits on the board of Rosneft. He is also a non-executive director at Glencore.
In a recent report, Oliver Wyman predicted between five and 10 “significant” competitors would emerge in commodities trading over the next five years.
The consultants predicted the move would be spearheaded by national oil companies which would attempt to build in-house trading arms in an attempt to squeeze higher returns from their assets and protect access to end markets.
Morgan Stanley plans to retain its oil trading business to facilitate client transactions.
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