Sunday, December 29, 2013

Morgan Stanley commodity sale to Rosneft

Morgan Stanley will sell its oil merchanting unit to Russia's Rosneft. Rosneft is the largest oil company in Russia, but is not an independent company in the traditional sense, but one that works for the interests of the Russian state. It would be hard pressed to say that it would make corporate decisions that were in conflict with state policy.

This sale is interesting for two reasons. First, it shows the growing commitment of Wall Street firms to get out of the commodity business. Usually a good sign that we are getting close to the commodity bottom when profit maximizing businesses are throwing in the towel. Clearly, the commodity business has not been generating the returns demanded by share-holders. Second, it is interesting that the sale is to a foreign company that is tied closely to the government. This places key logistical assets and information in the hands of a company that may not be profit-maximizing and that may have goals that are conflict with the US. In fact, it could be argued that this sale will reduce the level of competition in the markets and could lead to actions that will place a squeeze on prices at key market choke points. 

Given all of the actions taken by the CFTC to increase market transparency and competition, it is not clear that this sale will be in the bets interests of the market. It is an alarming trend to see more commodity assets in the hands of state owned companies. Is someone watching the competitive store?

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