Phillips 66 Sees Fuel Margins Staying Strong Into 2027

Phillips 66 expects refining margins to stay elevated through the third quarter and into 2027. Supply disruptions from the war in Iran will keep weighing on fuel markets through that period, Brian Mandell, the refiner's executive vice president of marketing and commercial, said Wednesday.

"The impacts of supply disruptions from the war in Iran look set to weigh on markets for fuels such as gasoline and diesel through 2027," Mandell said on an earnings call. "Refining fundamentals are very tight and getting tighter." Markets are short 7 million barrels a day of refined products from the Middle East and Asia, plus 1.4 million barrels a day from Russia, he said. "This really sets us up for stronger margins through Q3 and the rest of perhaps next year."

Phillips 66 posted adjusted earnings of $9.14 a share in the second quarter, the highest since its 2012 initial public offering. The profit surge follows a rally in refinery margins after the US and Israel attacked Iran earlier this year. Lost Middle East supply and refinery outages in Russia from Ukrainian strikes tightened the market. The conflict also drained strategic petroleum reserves, and Mandell said refilling those reserves adds to demand. He predicted the war would push countries to build new reserves "to protect against these types of geopolitical problems."

Refiners are postponing maintenance to capture current profits. "Continuing to postpone repairs will likely lead to unplanned outages," Mandell said. Facilities will also need considerable work in 2027 and 2028, pulling barrels off the market, he said. Even a reopening of the Strait of Hormuz would increase crude supply. It would not add refined product supply, Mandell said. Net additions of new refinery capacity will not be enough to meet anticipated demand growth, he added.

The 3-2-1 crack spread, a measure of profit for producing two barrels of gasoline and one barrel of diesel from three barrels of crude, hit an all-time high in July. It stood near $57 a barrel Wednesday, close to those records.

Ben Cook, a portfolio manager at Hennessy Funds who oversees two energy-focused funds, warned the run can reverse quickly. "These refining stocks are on stilts right now," Cook said. He argued that a clear end to the US-Iran conflict would likely trigger a sharp drop in shares of Phillips 66 and peers such as Marathon Petroleum. Valero Energy would face similar pressure. "They're crazy numbers," Cook said. "But they can easily slip backwards."

AlphaScala's risk scores put Phillips 66 at 66 out of 100, above Valero at 56 and Marathon at 54.