Even as the bank is reported to be considering selling a stake in its billion-dollar commodities unit, its physical trading activity in key U.S. markets is contracting in the face of abruptly changing market dynamics as well as diminishing risk appetite due to growing regulations and capital constraints.

In the power markets, it is trading only one-fifth as much electricity as five years ago. In oil, its imports to the United States fell last year to the lowest since 2004, while exports remain negligible. It barely makes the top 100 list of U.S. natural gas traders, with activity slipping from 2010.

Even the bank's prized subsidiary TransMontaigne, a Denver-based refined petroleum products supply and distribution company it bought for $630 million six years ago, hasn't helped it cash in on the boom in domestic U.S. crude oil trading this year. Its 2011 revenues were $152 million, up just 16 percent from 2007.

The data, based on government figures, port intelligence, securities filings and market sources, casts in sharp relief a trend that commodity traders say has been apparent for some time: Morgan Stanley (MS.N) is losing its edge in the opaque, over-the-counter cash commodity markets it once ruled.

"The regulatory strictures and capital requirements are leading many banks, I'd imagine, to look at their commodities business and wonder if it's still worthwhile," said Dr. Sharon Brown-Hruksa, vice president at Nera Economic Consulting and a former acting chairman of the CFTC.

"The passage of Volcker, position limits and capital requirements may make it difficult to maintain the commodities business. Energy trading, especially with physical assets, can be very capital intensive."

While its commodity trading revenues have fallen by nearly 60 percent since an estimated peak of over $3 billion in 2008, many analysts and traders say the group is far too important for the bank to part with in whole.

But facing a potential credit downgrade by Moody's this month and heightened restrictions on proprietary trading, the bank has explored a partial sale in the commodities trading division, CNBC reported on Wednesday.

The challenges ahead may hit Morgan Stanley harder than its peers who trade more in derivatives markets. The proposed Volcker Rule would limit the ability of federally protected banking institutions from using their own money to trade in the markets, possibly preventing Morgan Stanley from taking risks it says are necessary to succeed in illiquid cash markets.

A Morgan Stanley spokeswoman declined any immediate comment on its trading activities.

OIL SHRINKAGE

Along with archrival Goldman Sachs (GS.N), Morgan Stanley was one of the original "Wall Street refiners" that broke into the energy derivatives market three decades ago. Oil trading is still estimated to make up about half its commodities business.

But while Goldman and many rivals have shifted their focus more squarely to client "flow" business - market-making with funds, selling indices to investors or hedging corporate risks - Morgan has remained resolutely a merchant-trader, focusing on the business of storing or transporting raw materials.

The more traditional client trade only makes up about 10 to 15 percent of its commodities unit, according to a Nomura research report in March 2008 after a conversation with Colin Bryce, who runs the division together with Simon Greenshields. The rest is the merchanting business that has "higher barriers to entry...and requires more expertise".

In the early 1990s, Morgan Stanley oil trader Olav Refvik earned the moniker "King of New York Harbor" by securing a host of leases on storage tanks at the key import hub, giving the company an enviable position in the market. Refvik left Morgan in 2008 and now works for commodity trader Noble.

In recent years, the bank held great sway over the trans-Atlantic gasoline trading, importing the fuel along the East Coast from New England to Florida.

The bank still has sizeable leases, including a host of terminaling agreements with TransMontaigne. However the value of its future rental commitments for vessel charters and oil storage leases has fallen by a third since 2007, reach just below $960 million as of 2011, according to SEC filings.

Meanwhile oil market dynamics have upended one of its most substantial trading positions -- imports of refined fuels, especially diesel, gasoil and jet fuel, to the East Coast, where shrinking demand has resulted in excess refining capacity. Total East Coast imports have dropped by a third in four years.

In total, the bank imported some 96,000 barrels per day (bpd) of crude and oil products to the United States last year, down 28 percent from 2010 and the first time that its shipments have fallen below 100,000 bpd since 2004, according to company level import data from the Energy Information Administration.

In 2005, when U.S. gasoline shipments by the bank peaked, it imported nearly 55,000 bpd of gasoline, accounting for just over 9 percent of the U.S. total 603,000 bpd, the data show.

Its business has since shifted in favor of blending components, which made up more than 80 percent of its shipments last year. Import of distillate fuels like diesel and heating oil, once a mainstay, thinned to a trickle last year.

The domestic surplus has reversed the flow of fuel, creating an export boom -- one that Morgan Stanley has failed to exploit.

The bank's exports of refined fuels, a third of which is thinly-traded gasoline blending component Methyl Tertiary Butyl Ether (MTBE), have doubled in the past two years, but still amounted only a paltry 1,000 bpd, according to a Reuters analysis of data from shipping intelligence firm PIERS.

REFINERY DEALS

Like rivals, the bank has also built up its Canadian crude oil trading business, banking on a surge in output. Market sources say it has leased highly strategic tank capacity at the Hardisty, Alberta, storage hub, where crude from the oil sands is stored before being shipped to U.S. markets.

"Because they have assets both upstream and down, they are positioned well to trade, and with perhaps less risk," a Canadian crude trade source said.

But thus far it has yielded only minor success in terms of export trade. The Energy Department data show nearly four million barrels exported to the United States over the past decade, all of that during May and June of last year and all destined for a 170,000 bpd refinery in Toledo, Ohio.

That deal may have been aided by Morgan Stanley's agreement with independent refiner PBF Energy, which owns the Toledo plants as well as two in Delaware and New Jersey, to market the company's fuels. It is unclear when that deal expires, however.

Another piece in Morgan Stanley's trading arsenal has been recently removed. Earlier this year, PetroChina ended a 5-year with Morgan Stanley for crude supply and fuel market at two refineries in France and Scotland, sources have said.

POWER FADES

The bank's trading in power and gas markets, which make up an estimated 40 percent of its business, has also shrunk.

In 2007, Morgan Stanley's total U.S. power market transactions averaged about $3.1 billion per quarter, according to a Reuters review of Federal Energy Regulatory Commission reports. But by the first quarter of this year it had slumped to about $570 million, the lowest in at least five years.

Other banks too have pulled back. Goldman Sachs' trading volumes have fallen from $1.3 billion to $134 million over the same five-year period, the FERC data show.

Electricity traders said some banks, including Morgan Stanley, were reducing their exposure to the power market, in part due to the Dodd-Frank regulations.

While Morgan Stanley hasn't suffered as noticeable an exodus of senior traders as some rivals, including Barclays and JP Morgan, some say it seems only a matter of time before traders head to hedge funds and other private equity firms.

"The best traders are already on the move," said one power trader. "I hear others questioning why they're still there."

Morgan Stanley owns and operates electric power plants with more than 500-megawatt's of capacity in the United States, including Naniwa, a 380-megawatt power plant in Nevada, and two 100-megawatt plants in Georgia and Alabama.

Morgan Stanley ranked 89th among U.S. natural gas traders with total purchase and sales of 240.7 trillion British thermal units last year, down 13 percent from 2010 even as total market activity grew marginally, according to a Natural Gas Intelligence analysis of FERC's 552 filings data, verified by Reuters. Morgan Stanley's volumes are similar to 2008 and 2009.

LNG CHALLENGE

Even the bank's leading position in the market for liquefied natural gas (LNG) is now coming into question.

Morgan Stanley opened a commanding lead over other banks by jumping into the cliquey market in 2008, led by a team of four traders who work primarily in the Atlantic Basin.

It has two LNG ships on charter -- the Arctic Spirit and the Excel -- and is in talks to secure a third, according to one source with direct knowledge of operations. Last year it traded 21 cargoes of LNG, or roughly 65 billion cubic feet of gas, and has traded another 13 cargoes this year, the source said.

In February, it re-exported a cargo from the Sabine Pass terminal in the United States to Japan, where demand has rocketed following the lay-off of most of its nuclear plants. It has a deal to supply cargoes to Argentina, and also has short-term offtake deals from Trinidad and Nigeria.

"In moving volumes of LNG, Morgan Stanley has been the main bank," said Andres Rojas, analyst at Waterborne LNG in Houston.

But that market is now changing dramatically, with the United States poised to become an exporter -- and Morgan Stanley has yet to get a foothold in the market.

Others are moving ahead. JP Morgan has secured import rights to the Sabine Pass terminal in Louisiana, and Macquarie is seeking regulatory approval to export LNG from Texas.

(Additional reporting by David Sheppard, Jonathan Leff and Jeffrey Jones; Editing by Ed Davies)

• A Permanent Economic Emergency