US bank J.P. Morgan Chase & Co has started trading the naphtha market in Asia and aims to expand to gasoline trading, company sources said on Friday. The firm has hired Amrish Bahadur, a former BP trading analyst, to cover both paper and physical naphtha in Asia's oil trading hub Singapore and is looking at hiring more people in Singapore and London.
The bank, which already trades Asian fuel oil paper derivatives, is likely to be looking at leveraging naphtha trade and customer business off growing demand in North Asia for the petrochemical feedstock, used to make plastics.
"We are just kicking off naphtha paper trading and will be trading open-spec naphtha as well. We are doing this so we can round out our coverage of the oil barrel and be able to offer the full suite of hedging capabilities to our customers," said Muwaffaq Salti, head of the bank's energy trading in Asia. "We will be expanding into gasoline and petrochemical trading next," he told Reuters.
New petrochemical crackers from the Middle East to South Korea, booming car sales and expanding refining capacity across the continent mean higher demand for sales, risk hedging and exports to other regions, though banking competition is growing.
The bank joins leader Morgan Stanley in spreading its wings on physical oil markets. Morgan Stanley bought its first cargoes of physical fuel oil in Asia in recent years this month, after entering the physical market earlier this year, making it the only bank trading all physical oil products in Asia.
Analysts have said that some Wall Street investment banks may take a more active role in physical markets, shunned in the past as a high-risk, logistic-heavy endeavour, to protect profits on their commodities and energy paper trading businesses, which made them an estimated $7 billion in 2005.
J.P. Morgan's value-at-risk (VaR) for "commodities and other", an estimate of the maximum amount of money that the company's trading positions could lose in a single day to a probability of 99 percent, rose to $45 million in 2006, from $25 million in 2005 and just $3 million in 2003, company reports show. This was high compared to BP's $29 million and Goldman Sachs' $30 million last year.
Booming commodity markets have attracted a flood of competition, from peers such as Merrill Lynch and Societe Generale, oil majors like Royal Dutch Shell and even some hedge funds. Firms trading physical oil can exploit price differences between regions, blend low-quality grades into higher-value fuel or store oil to sell later at higher prices in a contango market. They can also complement forward paper positions by exerting greater influence on benchmark physical prices.