Bank orders traders to limit BP contracts

NEW YORK - One of Wall St's biggest banks has told its traders not to sign any contracts with BP that last more than a year, as concerns over its financial position continued to buffet the market.

An executive at Bank of America Merrill Lynch issued the edict yesterday, after a credit rating agency downgraded BP's debt. The bank's traders are no longer allowed to enter into oil contracts with BP that last beyond June 2011.

Limiting such contracts is one way that banks seek to protect themselves if they fear a trading partner might not be able to make good on its promises.

BP's oil trading division is an important contributor to its profits, but BofA Merrill Lynch is not a major player in the markets so the impact will be minor unless other banks follow suit - and there were no immediate signs that they would do so.

With oil continuing to spew into the Gulf of Mexico, and the long-term impact of the disaster still unquantifiable, BP's future has been hotly debated by investors in its shares and its debt.

The cost of insurance against a debt default by BP ballooned after President Barack Obama's television address, in which he again promised to hold the oil giant accountable for all the costs of clean-up and compensation.

The cost of that insurance used to be tiny, because the scale and reliability of BP's oil revenues meant defaulting on its debts was seen as a remote possibility. Yesterday, however, the cost was at an all-time high - up 50 per cent since Monday.

The pressure eased a little after the announcement that BP would put US$20 billion ($28.7 billion) into a ring-fenced compensation fund, a move that added some clarity to a situation that some speculators feared could escalate out of control.

On Monday, the credit rating agency Fitch had added to the firestorm by downgrading BP's bonds to just above junk status, reflecting the growing risks.

Previously, BP had been expected to pay for the costs of the clean-up gradually, but that changed when the Obama Administration began pushing for a ring-fenced fund into which the company must begin paying billions of dollars immediately.

"The scale of the rating action," Fitch explained, "has been partly driven by the increased risk that the balance between long and short-term cost payment may be skewed heavily toward the near term."

The fastest-growing bet on BP in the US stock-options market shows traders expect a 63 per cent plunge in about a month as costs surge for its uncontrolled well spewing oil into the Gulf of Mexico.

Options to sell BP's American depositary receipts in July at US$12.50 recorded the largest jump in open interest of any contract during the last two weeks, soaring to 33,445 outstanding from zero as the month began, according to data compiled by Trade Alert.

Investors buying the put options are wagering the shares will extend their drop from US$31.63 and wipe out US$140 billion from BP's market
value since April 20, when the Deepwater Horizon rig exploded.

- INDEPENDENT, BLOOMBERG