Bank of America Merrill Lynch has ordered its traders not to enter into oil trades with BP that extend beyond June 2011, a market source familiar with the directive told Reuters.
The order to the bank's traders came from a high-level executive and was made Monday, according to a source familiar with it. It told traders not to engage in trade with BP for contracts beyond one year from this month.
The directive didn't state a reason for the limit on longer-duration trades with the oil company, which comes as the British oil giant scrambles to stop an oil spill in the U.S. Gulf of Mexico for which it could eventually face billions of dollars in economic liabilities.
A BofA spokesman declined comment.
BP spokesman Toby Odone said the company doesn't comment on market rumors or speculation.
BP's US-traded shares closed up 2.3 percent Tuesday, at $31.40 a share. Shares were lower in London.
A source familiar with BP's trading operations said they have not been curtailed since the oil spill in April. BP wasn't informed of any new trading limits with BofA, which is a relatively small player in oil markets and not among BP's top trading counterparties, the source said.
The source familiar with the BofA directive said it reflects a cautionary stance toward trading with BP. However, the directive did not reference any reduction in overall credit volume the bank would extend to BP.
Limiting the duration of trades with a counterparty is one way in which banks can seek to protect themselves against risk that a company will be unable to meet its long-term obligations.
BP's credit rating was downgraded six notches on Tuesday by Fitch Ratings, which cited the high costs BP may face for compensating victims of the company's Gulf spill. Fitch downgraded BP to BBB from an AA rating.
A source familiar with the BofA directive said it could include any trades in physical commodities, derivatives and swaps for crude oil and products.
The British energy giant ranks among the world's top oil producers and traders in physical energy markets and derivatives.
BP's Macondo well in the U.S. Gulf of Mexico continues to spill oil into the Gulf after deadly explosions sank the Transocean Horizon rig in late April.
The potential for soaring liabilities related to clean up costs, economic damages and legal penalties that BP could face after the Gulf spill has led some analysts and bankers to speculate that the oil giant may throttle back its trading operations.
Several fuel oil traders have recently resigned from BP, including four traders from its Singapore office last week, industry sources told Reuters.
Banks typically require companies like BP to put up collateral to back trades in the private derivatives market, though for highly rated firms such as BP the collateral may be a small portion of the size of the exposure.
BP's credit default swap costs have surged in the past two months on increasing concerns over the company's creditworthiness, and traders and analysts have said some of the increase has come from banks hedging exposure to the oil company.
Credit default swaps are used to protect against the risks of a company or other borrower defaulting on its obligations, or to speculate on its credit quality.
BP's five-year CDS costs have jumped to 515 basis points, or $515,000 per year to insure $10 million for five years, from around 40 basis points in April, according to Markit Intraday.
BofA Merrill equities analysts maintained a "buy" rating on BP's London-traded shares on June 10, but cut their price target to 575 pence a share, down from a previous 700 pence.
The company reported around $10 billion in derivatives assets and over $9 billion in liabilities at the end of the first quarter.
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