London: High oil prices and booming commodity markets have started a new gold rush into the sector that will see more banks chartering tankers and renting oil storage facilities.
Morgan Stanley and Goldman Sachs have dominated in energy and commodities for more than two decades and were even known as Wall Street refiners.
Newcomers such as Lehman Brothers and Bear Stearns are eager for a share of global revenues from this sector that reached an estimated $11 billion (Rs44,000 crore) last year, up from around $7 billion in 2005, according to estimates included in a Credit Suisse research report.
They want to capitalize on a surge in demand for products to hedge volatile commodity prices, or to gain exposure to energy or other commodities as an investment.
Firms have tried before to gear up in this area, but many preferred to trade financially rather than physically. This time may be different as several new players are preparing to enter the physical trade in crude oil and many already trade gas. “Higher volatility has generated more hedging needs from banks’ traditional customers as well as more arbitrage opportunities for those engaged in arbitrage trading strategies,” said Amine Bel Hadj Soulami, global head of commodity derivatives at BNP Paribas.
“And being active in the physical market helps you better understand the dynamics of the market—what is driving supply and demand.”
Morgan Stanley has long been active in the physical markets in energy. The US bank has, for example, 45 ships on charter and numerous storage locations in North-West Europe. It owns power stations in Europe and the US. The bank also bought Heidmar, a US shipping firm, last year and also Transmontaigne, a transport company.
“We wanted to participate in the physical markets in commodities to be better able to hedge,” said Colin Bryce, who heads commodities at the bank. “If you are in the physical markets you can also spot trends in advance of the futures markets.”
Barclays moved into the commodities and energy arena a few years ago and is now about to start physical crude oil trading.
BNP Paribas has long-standing specialist commodities and energy related businesses.
But now a new wave of banks, including Bear Stearns, Lehman Brothers, UBS, Citigroup and JP Morgan are ramping up in Europe.
Santosh Menon contributed to this story.