Surging ethanol credits bring little joy to Wall Street


By Cezary Podkul

NEW YORK, Nov 7 (Reuters) - As the tiny niche market forethanol credits turned into this year's hottest commodity, thespike in prices didn't do much for the so-called Wall Streetrefiners.

The biggest commodity traders in the financial world haveeither steered clear of the opaque market for the credits orended up on the wrong side of a rally that saw prices surge asmuch as 2,900 percent in recent months, according to othermarket participants and bank officials.

Despite attracting public scrutiny over their role tradingthe renewable identification numbers (RINs) that were blamedthis summer for adding extra pennies to U.S. gasoline prices,the banks have mostly played only a small part in the market,the sources said.

Morgan Stanley Inc, the biggest physical gasoline anddiesel trader on Wall Street due to its import and terminalbusiness, has ended up short of the credits this year, forcingit to buy extra to meet its obligations, a spokesman said.

JPMorgan Chase & Co needs to collect the credits tocover a small gasoline-component blending contract in Texas. Itis also responsible for making up any shortfall in RINs at alarge Philadelphia refinery as part of a supply deal.

Goldman Sachs Inc, which is not a major oil productstrader, doesn't trade the credits at all, according to sourcesfamiliar with the matter.

The banks' limited engagement with a seemingly attractivemarket highlights the pullback in riskier dealing because of newU.S. regulations. It also shows wariness on Wall Street ofanything that may draw further scrutiny from Washington, wherebanks have been blamed for spikes in food or fuel prices.

In recent months, members of the House and Senate havecalled on U.S. derivatives regulators to look into potentialmanipulation of the market for the credits. And refiners havepegged high gasoline prices to the surging price of the credits,which they say have added nearly $2 billion to their costs thisyear.

Federal rules require refiners and importers of fuelproducts to collect RINs to show compliance with a 2007 lawmandating the blending of biofuels like ethanol into thenation's gasoline supply. The 38-digit number tracks each gallonof biofuel from the factory to the gas tank. If a refinerdoesn't buy and blend enough ethanol, the company must buy RINcredits in the open market to make up the shortfall.

To gauge the banks' foothold in the RIN market, Reutersanalyzed gasoline import data, refinery contracts and compliancedata, and interviewed traders active in the market. None of thethree banks own refineries, and with the exception of MorganStanley - a sizeable importer and blender of gasoline - nonehave had much of a reason to be active players in the market.

EPA rules allow anyone to register to buy RINs purely forspeculative purposes, not for compliance. Some proprietarytraders, such as Chicago-based DRW Trading, show up on acompliance registry kept by the U.S. Environmental ProtectionAgency. A spokesman for DRW would neither confirm nor deny thatit is still active in the market.

But outfits that have done the best trading in credits havehad a reason to be actively involved in the market.

Oil major BP Plc said it found itself with credits tospare and traded them for a profit earlier in the year. Swisstrading house Vitol SA, a major gasoline importer, is also saidto have done well trading the credits, which spiked from about 5cents in December to almost $1.45 in mid-July. They traded forabout 30 cents each on Wednesday.


Traders say Morgan Stanley has been a regular participant inthe RIN market this year. The firm owns a fuel marketingsubsidiary, Denver-based TransMontaigne Inc, which canblend ethanol and gasoline together at five or more terminals.That gives Morgan Stanley a steady supply of the credits.

However, Morgan Stanley is also a heavy importer ofgasoline, data from the U.S. Energy Information Administration(EIA) show. The bank has imported more than one billion gallonsof gasoline in each of the last three years and is on target tocome close to that amount in 2013, according to the data. Thatputs Morgan on the hook to collect at least 100 million RINcredits a year to show compliance with the 2007 fuel blendinglaw.

Until June, Morgan Stanley also managed supply and gasolinemarketing for a large East Coast refiner, PBF Energy.Morgan Stanley blended gasoline from two of PBF's refinerieswith ethanol for resale. Morgan Stanley said it passed allRINs it collected from the wholesaling of gasoline at PBF'sterminals back to PBF. For the gasoline bought in bulk and soldin bulk it collected no RINs.

Asked about its net position last month, a spokesman forMorgan Stanley said the bank has come up short of the creditsthis year and has been in the market buying more to satisfy itscompliance obligations.

As a result, "Morgan Stanley has not benefited from theincrease in price," the spokesman said.


Rival bank Goldman Sachs says it has not bought the creditsat all, either for its own book or for clients.

In July, the bank took over the PBF contract formerly run byMorgan Stanley and has similar arrangements in place with fourrefineries run by Dallas-based Alon USA Energy Inc. AGoldman spokesman said the bank is not obliged to collect RINsas part of the contracts or to cover PBF or Alon in case therefiners fall short on their obligations.

The EPA compliance database also shows 31 fuel blending andother facilities registered in the name of Goldman's commoditiestrading arm, J. Aron & Co. Goldman said it has not used thefacilities since at least 2008, when it became a bank holdingcompany in the midst of the financial crisis.

Nor does J. Aron import any gasoline, EIA data show, whichleaves it free of the compliance obligations Morgan Stanleyfaces because of its hefty import tab.


JPMorgan also appears to have little in the way of physicalgasoline import activities that would give it a meaningful rolein the RIN markets.

The last time the bank imported gasoline was in 2012, whenit brought about 22 million gallons into the United States,versus about 8 million in 2011, EIA data show.

The bank does have a contract to blend gasoline componentsinto finished gasoline at a terminal near Houston, according topeople familiar with the matter. Similar to a refiner thatmanufactures finished fuel products, the gasoline blendingforces JPMorgan to collect RIN credits to show compliance withthe EPA's biofuel blending rules.

It is not known how many credits that is. JPMorgan spokesmanBrian Marchiony said the bank's ethanol RIN inventory was lessthan 0.001 percent of an estimated 14 billion market for thecredits, which means it would need to collect less than 14million RINs.

In September, the New York Times reported that the bank hadstockpiled the credits ahead of their spike in prices. Marchionysaid in response to the article that "we simply do not tradeRINs, nor do we carry an inventory other than a marginal amountfor compliance purposes."

JPMorgan does, however, finance the oil supply for a largeU.S. refiner, Philadelphia Energy Solutions. The bank buys theoil for the company's 350,000 barrels-per-day Philadelphiaplants and gets repaid by selling the gasoline output - an"activity we could not survive without," PES Chief ExecutivePhilip Rinaldi previously told Reuters.

JPMorgan bought RINs for PES for several weeks in Septemberand October of 2012 when it first picked up the refinerycontract, according to a person familiar with the bank. Sincethen the refinery has managed its own RIN purchases.

As part of its arrangement with the refinery, JPMorgan actsas a custodian for the RIN credits. That means the bank overseesthe purchases to make sure PES doesn't fall short of itsobligations, according to the source.

Were it to do so, JPMorgan would have to make up thedifference.

View Comments (0)