J.P. Morgan Chase & Co. is in talks to sell its oil-supply agreement with a major Philadelphia refinery to Bank of America Corp., according to people familiar with the matter.

J.P. Morgan has a deal with Philadelphia Energy Solutions under which it supplies the refinery with crude oil and credit, and receives refined fuel products in return that it can trade. The refinery is one of the largest in the country, processing 330,000 barrels of crude a day, and is owned and operated by a joint venture between Sunoco Inc. and private-equity firm Carlyle Group LP.

The bank announced last year that it was selling its physical commodity assets as regulatory scrutiny and pressure on the business mounted, and returns deteriorated.

The refinery deal was initially included as part of a package of physical commodity assets J.P. Morgan agreed earlier this year to sell to Swiss trading house Mercuria Energy Group Ltd. for $3.5 billion. But Philadelphia Energy Solutions has a right of refusal if J.P. Morgan seeks to transfer its interest to other parties.

Sources familiar with the talks said Philadelphia Energy Solutions balked at accepting Mercuria as a partner in the arrangement. Mercuria, meanwhile, wasn't interested in that part of the business because it didn't meet the firm's targets for return on capital, and because terms of the agreement would have limited its ability to trade the refined products. The rest of the Mercuria deal is expected to close this fall.

The discussions between the banks have been going on for some time and it is still possible they could fall apart. J.P. Morgan is seeking a buyer for its end of the agreement under broader pressure from regulators to move banks out of physical markets for oil, metals and other raw materials, and it remained unclear how accepting regulators would be of another bank stepping into the role. It is unclear what Bank of America's strategy for the business would be.

There are multiple ways to make money from the refinery deal. J.P. Morgan supplies the refinery with as much as 120 million barrels of oil a year, collecting a per-barrel fee that can generate up to $30 million in revenue annually, while also earning interest on credit extended to the refinery and potentially profiting from trades used to hedge the output against price declines.

It isn't clear what the oil-supply agreement could be sold for.

Washington-based Carlyle struck a deal to take control of the Philadelphia refinery in 2012. Sunoco, which kept a one-third stake in the facility, had planned to shutter the facility, which was losing the company roughly $1 million a day. It was to be one of several refinery closures along the Eastern Seaboard in recent years.

The refinery accounts for about 25% of the East Coast's oil-refining capacity, however, and the White House, fearful of a fuel shortages and price spikes in the event of a closure, helped broker the deal with Carlyle. J.P. Morgan took over supplying crude to the 148-year-old refinery when Carlyle gained control.

Ryan Dezember and Sarah Kent contributed to this article.

Write to Dana Mattioli at dana.mattioli@wsj.com and Christian Berthelsen at christian.berthelsen@wsj.com

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