BP's Oil Trading Hums Along Despite Deteriorating Credit Risk

17th Jun 2010 12:37

(This article was originally published Wednesday.) By Brian Baskin Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--BP PLC's (BP, BP.LN) oil trading partners are sticking by the beleaguered company for now, even as concerns mount in other markets over escalating cleanup costs for the Gulf of Mexico oil spill. People familiar with operations at several of the largest banks active in trading oil derivatives said they have not altered their relationship with BP, nor have traders at energy companies that deal physical oil and fuel with the firm. Most contacted asked to speak anonymously, as their employers do not allow for relationships with customers to be discussed publicly. In the past, companies in financial distress have had to post additional collateral or offer stringent proof of available credit, often making trading prohibitively expensive. That hasn't happened yet for BP, said one Swiss-based fuel oil trader. "We still do not ask BP to open a letter of credit when selling to them...we do when companies are really in trouble," the trader said. Bank of America Merrill Lynch, a relatively small participant in the oil market, told its traders not to make deals with BP extending beyond June 2011, Reuters reported Tuesday. London-based BP has a much larger derivatives trading operation than many other global oil companies, and trades both to reduce exposure to market moves and to speculate on price swings. BP's value at risk, a rough measure of the size of the company's exposure in the oil market, averaged $29 million in 2009, close to the amount reported for all commodities by the largest financial institutions that trade oil. Investors have begun to worry about BP's long-term financial health as it's become clear that the company could face tens of billions of dollars in charges stemming from an offshore well that has leaked oil into the Gulf of Mexico for nearly two months. On Wednesday, BP said it would cancel dividend payments for the first three quarters and would create a $20 billion fund to compensate pay for damage from the spill. "Everyone's a little worried about their credit risk right now...they're everybody's favorite counterparty. It's very unfortunate," said Jim Marvin, who oversees electronic energy trading at the brokerage ICAP PLC (IAP.LN) in Jersey City, N.J. ICAP's electronic platform pairs trading partners anonymously, but Marvin said he had not heard from any customers worried about being on the other end of a deal with BP. ICAP handles cleared trades, where a firm trading with BP would be compensated even if the oil company ran out of funds. However, many of the banks and physical oil traders contacted by Dow Jones participate in transactions with BP that are not cleared. BP also remains a clearing member of the two leading exchanges where oil is traded, meaning the company can continue to guarantee trades for others, IntercontinentalExchange Inc. (ICE) and CME Group Inc. (CME) confirmed. Investors in the credit and equities markets are far less sanguine about BP's prospects. Fitch Ratings downgraded BP's debt to one level above junk status on Tuesday, and shares have dropped nearly 50% since the leak began. BP's five-year credit default swap, reflecting the cost of insuring the company's debt, spiked nearly 50% between Monday and Wednesday, though that market partially fell back after BP agreed to the $20 billion account. Even if fears of the spill bankrupting BP continue to ease, the company's counterparties may use the rapidly growing spill costs to negotiate more favorable trading terms, said Stephen Schork, editor of The Schork Report, an energy market newsletter. "BP is probably being forced to pay a premium as it were, a risk premium to entice some of these deals," Schork said. -By Brian Baskin, Dow Jones Newswires; 212-416-2453; [email protected] (Carolyn Cui, Paddy Gourlay, Rose Marton, Ken Clark, Katy Burne and Anusha Shrivastava contributed to this article.) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) -0- (MORE TO FOLLOW) Dow Jones Newswires June 17, 2010 07:37 ET (11:37 GMT)