Morgan Stanley May Run Larger Tankers

February 22, 2006

Morgan Stanley May Run Larger Tankers for Oil Trades
By Alaric Nightingale

Morgan Stanley, the world's second- largest securities firm, plans to expand its oil tanker business as global demand for crude rises, according to two people briefed on the discussions.

The company is considering operating suezmaxes, 1 million- barrel vessels that would be the largest Morgan Stanley controls, said the people, who declined to be identified because the plan is still being debated. The ships often haul crude from West Africa and the Black Sea to the U.S. and Europe.

Morgan Stanley, which has traded crude oil since 1984, wants to bolster its shipping unit to compete with companies such as Glencore International AG and Vitol Group. The New York-based company purchased a tanker operator last year for $200 million. Taking control of larger ships would help ensure the bank has sufficient quantities of crude to support its trades.

``Morgan Stanley is everywhere, but the physical presence is the one big thing missing in their book,'' Anthony Nunan, deputy general manager for international petroleum business at Mitsubishi Corp. in Tokyo, said by telephone. ``The physical business is getting bigger but more competitive.''

Carlos Melville, a Morgan Stanley spokesman in London, declined to comment on the plans.

By having tankers, a trader can try to influence the underlying oil price by buying or selling crude, boosting profit, according to Nunan. The price at which most derivative contracts are settled is determined by the price of the underlying oil.

Flexible Storage

Morgan Stanley is the world's biggest trader of oil derivatives, according to rankings compiled by Risk magazine.

It had more money at risk trading commodities than equities last year, according to an annual filing. So called value-at-risk, or the estimated amount its positions could lose in a day, was $30 million for commodities on average in the year to Nov. 30 and $28 million for equities, the filing showed.

No other banks operate oil tankers, said Nikos Varvaropoulos, a tanker broker for Optima Shipbrokers in Athens.

``It gives them the flexibility to target markets where there's a short-term demand that might have a higher price,'' said Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh. ``It gives them floating storage so they can deliver to anyone, anywhere in the world.''

The Paris-based International Energy Agency estimates demand for oil will rise 1.8 percent to 86 million barrels a day in 2007.

Heidmar Ships

The ships would be run by the Heidmar Group, a Connecticut- based shipping company Morgan Stanley bought in September. As the operator of the vessels, Morgan Stanley doesn't own the assets so it doesn't carry the risk of their value depreciating.

The Heidmar acquisition gave Morgan Stanley access to a fleet of 87 smaller tankers, with the biggest capacities approaching 843,000 barrels. The purchase price was disclosed in a regulatory filing Oct. 6.

Morgan Stanley does not disclose how much it uses the Heidmar fleet, Mark Lake, a spokesman for the bank in New York, said.

The bank rarely ships physical crude oil, according to Jean- Francois Vincke, a freight trader for Riverlake Shipping SA in Geneva. When the bank wants to ship refined oils the vessel booking is discussed privately with Heidmar, making it impossible to judge how much Morgan Stanley uses its current fleet, said Truls Dahl, a tanker broker for Fearnleys AS in Oslo.

Suez Canal

Suezmaxes carry the name because they're the biggest tankers that can navigate Egypt's Suez Canal when fully loaded. They cost about $80 million, according to Fearnleys, a shipping broker.

``They don't want to be caught with a cargo in the market place and have freight rates destabilizing their trading activities,'' said Sverre Bjorn Svenning, a director at Fearnleys.

A larger class of tanker, called Very Large Crude Carriers, or VLCCs, can transport more than 2 million barrels of oil.

A bigger fleet of ships gives an owner more bargaining power over hiring prices. Heidmar doesn't have to disclose how much the carriers cost to hire, or who is buying the cargo. Heidmar also ships oil products such as gasoline, naphtha and jet fuel.

Morgan Stanley said today its investment management division agreed to buy 80 percent of Montreal Gateway Terminals from European tour operator TUI AG.