As US and European banks drop out of commodity trading, Gulf state firms along with Russian and Chinese companies are filling the gap in an attempt to exert greater control over the pricing of the raw materials on which their economies so heavily depend.

Last week, the Kremlin oil champion Rosneft bought the oil trading unit of Morgan Stanley, one of the largest and oldest trading desks on Wall Street, as banks reduce exposure to trading.

The state companies are joining trading houses like Glencore and Vitol and large oil firms like BP and Shell to take advantage of the retreat from trading by banks because of the greater regulation of banking activities that followed the 2008 financial crisis.

It won't be long before such deals are repeated, say executives from major trading houses as they see a new class of rivals challenging their supremacy in connecting buyers and sellers of commodities, predominantly oil.

"The commodity merchant business is in a period of flux at this time and I think that the deck is getting shuffled as to both who the participants will be and how the business is going to be conducted," David Messer, CEO of US merchant Freepoint Commodities, told Reuters last month.

"Banks by and large are moving out of the trading of physical commodities. On the other hand you have new entrants, large state enterprises, Sinopec, Gazprom, Petrobras . These are all entities which are increasing their merchant and trading capabilities."

"I think that the banks will become more of what they used to be, which is financiers, and I think the new participants are going to create competition for streams of commodities that used to be handled exclusively by merchants," said Messer.

Morgan Stanley is not alone in exiting commodities trading. Out of its four biggest rivals, Deutsche Bank has already quit, Barclays has reduced its trading operation by a fifth, JP Morgan is selling out and only long-time leader Goldman Sachs is sticking to its guns.

Prior to clinching the deal with Rosneft, Morgan Stanley was in talks with Qatar and Chinese firms, market sources said. Morgan Stanley never commented on those talks.

JPM has Grupo BTG Pactual, a private bank from resources super-power Brazil, amid contenders, according to sources. JPM is not commenting on the sale.

Russia's Gazprom, the world's largest gas producer, has built a substantial gas trading division in London and Sigapore and the world's top oil exporter, Saudi Aramco, has also began building a trading operation.

"We will see national oil companies ... beefing up their trading so it's all set for high competition in a sector that is overcrowded already," Torbjorn Tornqvist, CEO of trading house Gunvor, told Reuters last month.

Consultants Olyver Wyman said last month that even as trading houses were moving increasingly into the logistics, producers and consumers were also becoming increasingly aware of trading as profit generator.

"Energy players are doing this in part because independent traders' earnings are increasingly calling attention to the fact that commodity producers could earn potentially billions of dollars more by broadening their options for delivering commodities to clients," Olyver Wyman said in a report.

For Ian Taylor, the head of the world's largest oil trader Vitol with net profit of $1.7 billion in 2011, it is also clear that a lot of new entrants will come from Asia as they are trying to pursue incremental profits.

In fact, China has already quietly built powerful global trading desks at state-backed Unipec and PetroChina . "These are formidable forces," said Tornqvist.

"What is important for them is to be in control of the major flows ... They understand that it is a global market and what happens in one part of the world still is important for them".

Marco Dunand, the head of trading house Mercuria, says that over time China will become one of the dominant players in setting benchmark prices for commodities.

"China will develop the commodity market in the same way Europe or the US have developed with an internal market with arbitrage opportunities, storage and logistics. And we also believe that over time, China will open the commodity market to a more competitive environment," he told a Reuters Summit last month.

The rise of state champions in trading poses new challenges for trading houses, which alongside Western oil majors like BP or Shell have dominated the space for decades.

"Fundamentally, the number of barrels that are tradable these days is shrinking," says Alex Beard, the head of oil at Glencore, as traders witness China clinching direct deals with producers in Africa and Latin America.

With trading houses now facing slimmer profit margins, they are trying new recipes for growth including competing with banks and majors in providing capital to projects, according to Messer.

Taylor's Vitol recently teamed up with US private equity group Carlyle to own refineries in Europe at a time when majors are ditching them due to poor profits.

"This could be the direction the market takes as more major oil companies are leaving the space. There is room for companies like Vitol combined with private equity like Carlyle to get into this space," said Marcel van Poecke, managing director at Carlyle International Energy Partners.

One competitive advantage that trading houses will keep over state-backed rivals is the ability to quickly adapt to changes.

"It is a constant model of trying to re-invent yourself, which we have done for more than 20 years," said Mercuria's Dunand.

Gunvor's Tornqvist goes even further back in history.

"The Iranian revolution created (oil) trading houses and then they faded away until the next upheaval, until the Gulf War, the collapse of the Soviet Union and then the resource boom last decade. So we are in this period where it is realistic to see a moderation in margins," he says.-Reuters