Derivatives monster Morgan to enter oil market

JPMorgan Eyes Physical Oil Trade, Eyes $200 Oil

By Sambit Mohanty
Reuters
Thursday, May 15, 2008

http://www.reuters.com/article/reutersComService_3_MOLT/idUSSP1485012008...

SINGAPORE -- JPMorgan Chase & Co will begin trading physical oil by year-end, increasing its exposure in a market that could rise to $200 a barrel, the bank's global head of commodities said on Wednesday.

The bank plans to expand in commodities and energy trading, Blythe Masters said, despite expectations of job cuts in other areas as it prepares to take on staff from Bear Stearns at the same time it deals with turbulent financial markets.

"We will start trading in physical oil and refined products by the end of this year," she told Reuters in an interview.

JPMorgan will join a growing list of investment banks from Goldman Sachs to Barclays Capital seeking to boost profits on their big derivatives trading desks by gaining a foothold in physical markets.

The third-largest U.S. bank added 50 people to its commodities and energy trading and investment team last year and is on track to hire a similar number this year, taking the strength of the total team globally to 450, Masters said.

Earlier this month, it hired former Goldman Sachs banker Oral Dawe as managing director and CEO of its Asia Pacific commodities group, in addition to hiring more than a dozen traders in Asia recently to oversee its expansion in energy and metals.

And with oil prices surging more than 30 percent this year to a record near $127 this week, Masters said the bank would look at more ways to boost its presence in energy markets.

"Oil rising to $200? It could happen. This year? You could see it, although it would take a further shock to expectations," she said.

"Supply disruptions, geopolitical events, increased demand for refined products, weather, additional investor inflows driven by shifting inflation expectations -- they could all contribute to high oil prices," she added.

... Limited impact

Masters shrugged off the impact of the U.S. credit crisis, saying robust growth in demand from emerging markets could more than offset a slowdown in demand in the United States.

"I think the prospects for the natural resources sector and commodity businesses are strong and are not really derailed in any sense by the credit crisis in the United States."

"Urbanizing populations in markets like India and China are driving the appreciation in commodity prices," she added.

In addition to oil, Masters expected prices of metals and grains to remain high in the near to medium term as supplies would take some time to catch up with rapidly rising demand.

"I think high commodity prices are staying for some time but you could also see corrections and you will certainly see high volatility. The current inflated prices are a reflection of fundamental factors, not just speculation," Masters said.

"On the supply side, there are still major shortfalls in infrastructure as a result of sustained period of under investment in commodities that has not yet been undone."

JPMorgan came under fire in March after it acquired a nearly insolvent Bear Stearns with involvement of the Federal Reserve and at a fire-sale price. It expects to complete its takeover of Bear around June 1.

The bank could cut as many as 4,000 of its own employees worldwide as it prepares to take on staff from Bear, people familiar with the situation said on Tuesday.

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