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Oil dealers in the US are not obtaining the letters of credit or other guarantees now required by law if they sign pre-buy contracts with customers placing forward orders for heating oil. Officials are concerned that volatile energy prices and the credit squeeze will force oil dealers into bankruptcy, leaving customers who pre-buy heating oil with no refunds because the dealers have not arranged sufficient guarantees should they fail to deliver.

In August, the Attorney General's office in the US state of Maine advised heating oil customers who sign pre-buy contracts with dealers to check up on the companies to reduce their risk of losing money. Eight years ago, thousands of people in New Hampshire and Maine who prepaid J L Oliver Enterprises when it offered cheap heating oil lost money when the firm closed after it could not afford to buy the oil. More Maine residents finished up without oil or the money they paid for it when Oaklandbased Petroleum Products Cooperative declared bankruptcy around two years ago.

The Oakland incident prompted the authorities in Maine to tighten their regulations. Dealers may not now offer prebuy contracts for oil, kerosene or propane unless they have obtained financial protection, which could include an L/C or a surety bond or contracts with wholesalers that guarantee the ability to buy 75 per cent of the gallons needed for customers at a fixed price. This is not happening, according to officials charged with accepting customers' money for prebuy contracts with companies that failed to deliver the oil.

In addition, a combination of the credit crunch and soaring fuel prices have pushed the costs of L/Cs used in physical oil trades sky high and forced investment banks to reconsider whether they will continue in what was once a very lucrative business. At least one major bank involved in physical trading of oil has called a temporary halt to its Asian operations, but even banks that opt for the less credithungry occupation of trading in oil futures are finding the going tough.

Morgan Stanley, which has traded physical distillates such a jet fuel and diesel for around ten years, has reportedly put its fuel oil trading business in Asia on hold. Morgan Stanley is the only investment bank with an established trading expertise in the physical oil market, and industry sources report that the bank's exit appears more likely the result of volatile market conditions than a lack of expertise or will. Soaring oil prices over recent years means that a 60,000-ton cargo of gasoline now requires an L/C worth USD 60 million. In 2002, a comparable cargo would have needed an L/C worth just USD 16 million.

BNP Paribas has closed its Asian oil derivatives unit in Singapore, while Fortis has shifted its trading team to Houston just months after establishing its operation in Singapore.

In some good news for the oil industry, a divided US Supreme Court slashed the amount of damages oil major ExxonMobil will have to pay for the 1989 Valdez disaster to USD 507.5 million, ending a 19-year legal saga over the worst oil spill in US history.

The court cut the punitive damage award to USD 2.5 billion, a drop in the ocean for the oil firm and half what it had set aside and reserved under a letter of credit.

The judges voted 5-3 for the reduced damage award, concluding that the original award was excessive under federal maritime law. The court found that the spill was caused by recklessness, rather than intentional wrongdoing, and was not part of a company effort to augment profit. The world's largest oil company had obtained an L/C and set aside USD 5.4 billion to cover its payments in the case.