Reuters: Private Equity: COLUMN-Carlyle deals another blow to gasoline bulls' hopes-Campbell

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COLUMN-Carlyle deals another blow to gasoline bulls' hopes-Campbell Apr 23rd 2012, 14:17 Tweet Share this Email Print Mon Apr 23, 2012 10:17am EDT By Robert Campbell NEW YORK, April 23 (Reuters) - The supply-crunch assumption behind this spring's rally in gasoline prices took another blow on Monday as Sunoco deferred the shutdown of its Philadelphia refinery for another month as talks intensify with a private equity buyer. Sunoco announced it would extend the deadline for the shutdown of the 330,000 barrels per day refinery by a month to August while it tried to firm up a joint venture with the Carlyle Group. That pushes back the specter of future cuts in U.S. gasoline supplies until later in the summer at the very least, and perhaps even ensures the Philadelphia refinery will survive. Good news for the workers at the refinery, but bad news for anyone hoping to profit from its demise in the form of higher gasoline prices. To recap, gasoline grabbed the leadership of the oil market in late 2011 as a spate of threatened refinery closures raised the prospect of sharply tighter Atlantic basin gasoline balances. Gasoline bulls were fighting against a long-term secular downtrend in European gasoline demand that has created a growing lake of surplus gasoline on the continent that has to be dumped somewhere. They also faced a surprisingly weak U.S. market for the fuel, where demand has continued to contract even as the economy has edged away from recession. But the idea was that the deep cuts in refining capacity would more than offset weak demand, creating a space for a powerful price rally in gasoline. A funny thing happened on the way to market with this trade. While initially a huge success, the spike in refining margins it engendered is stimulating a boom in gasoline output. U.S. gasoline stocks have fallen, something quite normal for this time of year, and yet they remain above year-ago levels. Already European gasoline cargoes are starting to show up in volume again on the U.S. East Coast as they try to find a way to market before prices fall. Even worse for gasoline bulls is the fact that this spring's rally is clearing the way for some of the doomed refineries to remain in business. HERE COMES MOTIVA So far that hasn't been enough to deter those who are perhaps later to the party than others, both in the futures pits and in the real world of pipestills and tanks. Net speculative length in RBOB gasoline futures has not yet started to fall sharply, according to the most recent Commodity Futures Trading Commission data. Meanwhile plenty of buyers are still sizing up potential refinery acquisitions even as margins retreat. Philadelphia does have a niche role in U.S. East Coast diesel markets and Sunoco has experimented with getting access to cheaper inland crude oils in a bid to cut losses. But these factors have so far not been enough to convince Sunoco that it can make a long-term go at the business. So perhaps Carlyle is betting that a surprising upturn in the U.S. economy will put an end to the declines in gasoline demand and give them a chance to exit their investment at a profit before any major capital spending is needed at the refinery. But this bet risks foundering on the same rocks that have holed the summer gasoline rally. Carlyle are not the only ones trying to turn a profit by rescuing an unwanted refinery. Every one of Petroplus' refineries in Europe has attracted a buyer. Delta is looking at restarting ConocoPhillips' shuttered 185,000 bpd Trainer, Pennsylvania refinery. And of course, Motiva, the U.S. refining joint venture between Saudi Aramco and Shell, is poised to inaugurate the massive expansion of its Port Arthur refinery this summer that will add a big slug of gasoline output to the picture. Meanwhile the long term factors pushing down on gasoline are not going away. Demand destruction in Europe remains a reality and U.S. consumption remains lackluster. Tighter fuel efficiency standards and mounting biofuels mandates make things even trickier for oil refiners. And yet oil refining is still attracting firms with money to burn who seem to think they know the business better than those companies desperately trying to dump refineries. At least, unlike other erstwhile refinery saviors like Delta Airlines, the Carlyle Group has some experience with the oil refining industry. After all the private equity giant played a big role in the 2005 buyout of European independent refiner Petroplus and its subsequent debt-laden relaunch on a collision course with the brutal realities of the global oil market. Tweet this Link this Share this Digg this Email Reprints Comments (0) Be the first to comment on reuters.com. Add yours using the box above.

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