Home / Business / U.S. merchant refiners take oil trading back in-house
Getty Images via NewsCred

U.S. merchant refiners take oil trading back in-house

NEW YORK, Oct 9 – Independent U.S. refiners are taking back control of their crude supplies just a few years after outsourcing trading to Wall Street banks and bigger companies, hoping to capture more profit from a global market in flux.

After the financial crisis of 2007-2009, a number of ailing U.S. refineries were sold to investors such as Carlyle Group and Delta Air Lines Inc, which lacked the credit agreements or oil trading expertise to efficiently supply their new plants. So they struck deals with the likes of Morgan Stanley and BP to find and purchase crude on their behalf.

But the unexpected U.S. shale oil boom has upended the industry, leaving refiners looking inward for crude from places such as North Dakota and Wyoming instead of scouting for barrels in Africa or Europe. It has also caused dramatic flux in domestic prices and a vast expansion of infrastructure, opening up opportunities for nimble traders.

So now, many independent refiners are taking their trading arrangements in-house, shedding old deals, hiring new traders and adding new competition for the middlemen and logistics firms that have profited from the shale boom.

On Tuesday, Philadelphia Energy Solutions LLC, the biggest refinery on the East Coast, became the latest to join the trend, severing a two-year-old supply and logistics agreement with JPMorgan Chase & Co in favor of a pure inventory and capital finance arrangement with Bank of America Corp.

The switch was initially triggered by JPMorgan’s decision to quit physical trading, making it the latest bank to bow out of commodity markets amid regulatory pressure. That trend is another reason refiners are looking to trade for themselves.

But PES, which is backed by Carlyle, was also seeking greater flexibility in its trading and logistics operations, as well as a financial partner that would not compete with it in markets, according to a source. With the deal, PES will take control of its own logistics, previously handled by JPMorgan.

“These refiners are seeing a lot of profit for the middle man, and they are saying to themselves ‘why shouldn’t we capture that profit,'” said Houston University professor Edward Hirs, an expert in energy finance.

“So, they are hiring bright people, with MBAs and experience, to do it.”

Others have already done so.

This past summer, PBF Energy – run by Thomas O’Malley, a legendary refinery investor who once ran energy trader Phibro – ended the last part of a deal with Morgan Stanley.

Even Delta Air Lines’ Monroe Energy division, which runs a refinery in Trainer, Pennsylvania, has sought to improve its supply options, scotching a supply deal with BP and chartering its own U.S.-flagged tanker. It also hired Hugo Zagaria, a senior trader at Plains All American for the past decade, to run its refinery supply operations.

All the firms declined to comment for this article.

For a related article, click here: U.S. refiners struggle with too much light crude: Kemp.


The U.S. shale oil boom has yielded a profit bonanza for well-placed drillers, a revival of margins for refiners replacing costly imports with cheaper domestic crude, and a cash windfall for midstream companies that have the trucks, trains, pipelines, barges or terminals for transporting crude.

It has also been a boon for U.S. domestic crude oil traders. The speed and scale of shale production has triggered a series of gut-wrenching surges and slumps in opaque cash crude markets over the past four years – the kind of volatility that can open up profitable arbitrage for those who can anticipate it.

That flexibility is particularly important on the East Coast, where margins tend to be thinnest and being able to trade well may be the difference between profit and loss.

PBF enlisted Morgan Stanley’s services several years ago, when it bought a trio of refineries in the eastern United States at a time when falling oil demand and rising overseas crude costs suggested a gloomy outlook for the industry. The Wall Street bank’s financing and hedging support was crucial for getting the business off the ground, executives said.

But things changed. It now deals directly.

The mid-continent supply arrangement and a required hedging deal had cost PBF $22 million in the first half of the year, executives said in August.

“We believe the combination of PBF facing the market and the unhedged strategy will result in lower cost of crude throughout our refining system,” O’Malley told analysts.

Refiners have good reason to be bolder. The nation’s six largest independent refiners by market capitalization lost some $1.5 billion in 2009. Last year, they earned nearly $10 billion, according to data available on Thomson Reuters Eikon.

How much of that resulted from improved trading flexibility is open to debate. Big companies with refineries such as Phillips 66 and Marathon Petroleum Corp have long run trading desks but do not discuss their trading operations. A Tesoro Corp spokeswoman said only that trading and procurement was highly important to overall profitability.


Many refining companies have also invested in pipelines, terminals and other infrastructure to give themselves more options for getting the cheapest crude.

Western Refining, which has done its own trading for years, recently spun off its logistics unit into a master limited partnership.

“We’re buying more from producers than in the past. We have more of the infrastructure in place to do that,” said spokesman Gary Hanson.

He declined to discuss the size of Western’s Tempe, Arizona-based trading desk but said it expanded recently to supply its Northern Tier subsidiary, which runs a refinery in Minnesota. Northern Tier quit a four-year-old supply and financing deal with JPMorgan last month.

It remains to be seen whether new trend is a lasting one.

“These companies are looking at the landscape, and they are saying we need to change with the times and stay ahead of the curve,” said Don Fullerton, a finance professor at the University of Illinois. “It really comes with the new technology, but it’s hard to say whether it’s a fad or the real thing.”


(Reporting by Jonathan Leff; Editing by Steve Orlofsky)