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A Private Commodity Trader that Should be a Long-Term Core Holding

JP Morgan circulated offering documents yesterday to try and sell their physical commodity operations in copper, oil and natural gas.  Why are they leaving, who's staying and is there something investable here?  

First, it is critical to understand why investment banks like JP Morgan got into the physical side of the commodity business in the first place, even though their natural role is on the financial side.  The first to enter into physical commodity trading was Morgan Stanley with their purchase of terminal and storage units for gasoline and heating oil in NY harbor.  What became clear to the folks at MS and to the rest of the investment banks was that an insight into physical trading of a commodity helped enormously in trading the connected commodity futures markets.  While many of the investment banks will claim that their physical assets allow them to deliver clients an edge in risk management services, that edge is largely delivered to the bank traders themselves.

Or at least it was.  Since the collapse of financial markets in 2008, the steady flow of commercial-based trading for risk control has largely dried up. Commodity producers in oil, grains and metals have also cut their trading operations, preferring to concentrate on core business during the slow industrial recovery since the financial crisis.   Many of the complaints from the IB's about increased regulatory scrutiny on physical operations is a feint from…




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