By Nia Williams
CALGARY, Alberta, May 14 (Reuters) - Citigroup Inc
plans to start trading physical Canadian crude oil, three
sources have told Reuters, setting itself up to jockey with
banks and traders to fill the vacuum left by other Wall Street
giants offloading physical commodity businesses.
Three participants in the Canadian crude market, who
declined to be named because they are not authorised to speak to
the media, said Citi is in the process of preparing for physical
trading of the most liquid Canadian grades.
That would likely include Western Canada Select heavy blend
, the de facto Canadian benchmark, as well as sweet
A spokesman for Citi declined to comment.
Citi's expansion into the physical market bucks the recent
trend of big U.S. banks retreating from commodities trading as
tighter government regulations eat into profits.
JPMorgan Chase & Co is preparing to sell its
physical commodities business, including a collection of
long-term leases on more than 6 million barrels of storage tanks
in Hardisty, Alberta.
Morgan Stanley is selling its global physical oil
trading business, including its Canadian division, to Russian
state-run oil company Rosneft.
"There has been this negative attention but it seems there's
still space to maneuver and to operate profitably, and to serve
the needs of their clients," said Raymond James analyst Daniel
Marchon. "Citi would not be getting into this if it was not
important to their institutional clients."
Citi is seeking to rebuild its commodities trading
operations, which focus on power and gas, after scaling back its
exposure to energy, metals and agricultural markets following a
government bailout during the world economic crisis.
In Canada, Citi would compete with big commodity merchants
like Vitol, Glencore and Trafigura, as well as oil producers
like Suncor and Cenovus.
The bank's revenue from commodities transactions nearly
doubled in the first quarter of 2014 year-over-year. Last year
Citi was No. 10 among the world's top 10 investment banks in
commodities according to UK consulting firm Coalition.
The top 10 banks together made $4.5 billion trading
commodities in 2013, Coalition said, down from more than $14
billion in 2008.
BARRIERS TO ENTRY
Canadian crude production is expected to more than double to
6.7 million barrels per day by 2030, according to the Canadian
Association of Petroleum Producers, making the physical market a
potentially lucrative source of trading revenue.
However, the volatility of the market, with WCS discounted
at $10 to $40 a barrel below U.S. benchmark crude futures last
year, deters some new entrants.
The risk required can be a deterrent, said one of the
traders, speaking from Canada's oil capital, Calgary. He said
new entrants need access to credit lines and at least 10 to 15
counterparties willing to do business with them.
New entrants also face challenges in attracting business as
people need to determine "whether they want to take a risk in
doing business with you," he added.
For a bank like Citi, already well-known for trading
financial crude contracts and physical barrels in the U.S. oil
market, counterparty credit is a minor issue.
However, a sticking point could emerge over what general
terms and conditions govern trading. One source said industry
standard is either BP Plc's or ConocoPhillips'
terms and conditions because they have been around a long time
and are seen as the most fair to both buyers and sellers.
If Citi insists on counterparties signing up to the bank's
own proprietary terms and conditions, setting up trading
partners may be a struggle.
None of the sources were able to say whether Citi had
entered into talks to buy or lease storage space, which enables
market players to ride out the more volatile price swings often
caused by heavy congestion on export pipelines out of Canada.
The exact timing of the launch is not yet known.
(Editing by Eric Walsh)