Under the proposal, the No. 2 U.S. air carrier would purchase the refinery and JP Morgan’s commodities team would finance the refining process, including buying and shipping crude oil from overseas, according to the source, who spoke on the condition of anonymity.
Delta, which has struggled with high fuel costs, would then buy the jet fuel from JP Morgan at a wholesale rate, and the bank would sell the other products made by the refinery into the market, the source said.
CNBC previously reported the news, saying that Delta is looking at paying $100 million to $200 million for the refinery.
In addition, CNBC said, at least two oil companies have partnered with Delta in a swaps arrangement in which they would give the airline jet fuel in exchange for some of the other fuel produced by the refinery. The report did not identify which oil companies are involved in the swap deal.
Another source familiar with negotiations told Reuters no deal had been sealed and that the Trainer refinery had several other bidders besides Delta.
A JP Morgan spokeswoman contacted by Reuters declined to comment. A Delta spokesman said the airline could not comment on rumors about the refinery.
“JP Morgan is most likely insisting that if they are going to manage the crude, they are going to manage the product offtake as well,” a veteran oil products trader, who asked not to be identified, told Reuters.
“There is a lot of financial risk for the Trainer deal. This would be one way for JP Morgan to keep tabs on what Delta is doing.”
Earlier this month, the board of Delta had met twice to discuss a potential bid in an unprecedented effort to hedge fuel costs for the airline, the world’s largest commercial buyer of jet fuel, a source familiar with the talks told Reuters.
Trainer is one of three refineries in the Philadelphia area that has been pushed to the brink of closure by the high cost of crude oil feedstock and waning fuel demand. The plant makes a higher percentage of jet fuel than any other refinery on the U.S. East Coast, accounting for a third of the jet-kerosene capacity for the region.
The deal would also offer JP Morgan’s oil traders a real-time view of supply and demand near the New York Harbor, pricing point for the two main U.S. oil product futures contracts, RBOB gasoline and heating oil -- the distillates contract used for hedging jet fuel and diesel exposure.
Banks are locked in a struggle with the U.S. Federal Reserve over tighter restrictions on their ownership of physical commodity assets after the financial crisis.
Agreements on supply and offtake between banks and refineries are not uncommon, however, with JP Morgan, Goldman Sachs and Morgan Stanley tied into deals with independent refiners in the United States, including Alon , Northern Tier and PBF Energy.
In a study commissioned by Morgan Stanley, consultancy IHS CERA said in February that supply-and-offtake deals among independent refiners and banks had allowed many such plants to stay open after integrated oil companies started to exit refining.
“Many of the buyers have been new entrants to the U.S. refining sector and lack the resources and expertise to commercially market production effectively, obtain attractive financing for inventory and manage unhedged margin risk,” the IHS study said.
“The U.S. banks have filled an important role in regard to overcoming these issues and have effectively reduced the barriers to investment funding and successful commercial operations.”
High jet-fuel costs
Delta spent $12 billion on jet fuel last year, with its average pricing rising by 31 percent to $3.06 a gallon. Last year, the company’s aircraft consumed 3.86 billion gallons, or just over 250,000 barrels per day, of jet fuel.
While many airlines use derivatives or even long-term physical deals in an effort to control their future jet fuel costs, buying a whole refinery would mark an extraordinary step to ease the pain of rising prices.
Analysts have said Delta could struggle to make the refinery profitable after many integrated oil companies and independent refiners have incurred large losses in their downstream business as high crude costs squeezed margins.
Tom Claugus, founder of GMT Capital Corp, a hedge fund in Atlanta that owns Delta Air Lines shares, said earlier this week that buying a refinery was a bad idea for the carrier.
“It’s good for management teams to think very broadly and look at all sorts of different options, but my own view would be that owning a refinery borders on the bizarre,” he said. “It would be a significant error.”