Phillips 66 Expects Soaring Fuel Margins to Last Into 2027

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(Bloomberg) — Fuel-makers enjoying skyrocketing profits will likely keep reaping standout margins through the next quarter and beyond, according to an executive from a top US refiner.

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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, said Brian Mandell, executive vice president of marketing and commercial at Phillips 66, on an earnings call Wednesday.

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“Refining fundamentals are very tight and getting tighter,” Mandell said. Markets are short 7 million barrels of refined products a day from the Middle East and Asia, and another 1.4 million barrels a day from Russia, he added. 

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“This really sets us up for stronger margins through Q3 and the rest of perhaps next year,” Mandell said.

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The independent refiner posted an adjusted earnings-per-share of $9.14 in the second quarter, the highest on record since the company’s initial public offering in 2012. 

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Refiner margins surged in the months after the US and Israel attacked Iran. Lost supply from the Middle East and refinery outages from Ukrainian attacks on Russia tightened supplies dramatically. 

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As the Mideast conflict dragged on, operators of strategic petroleum reserves drained supplies. Now reserves need to be refilled, adding to the demand outlook. And the war will likely trigger the creation of new reserves to “protect against these types of geopolitical problems,” Mandell said.

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Refineries also are delaying maintenance in order to capture profits. Continuing to postpone repairs will likely lead to unplanned outages, Mandell said. Facilities will also need to conduct considerable work in 2027 and 2028, pulling barrels off the market as they do.

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Fuel markets also face structural constraints, Mandell said. A reopening of the Strait of Hormuz would increase crude supply but not refined product supply, and net additions of new refinery capacity will not be enough to meet anticipated demand growth, he said.

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A metric of refiner profitability known as the “3-2-1 crack spread” hit an all-time high in July. The spread is calculated by averaging the per-barrel margin earned by producing two barrels of gasoline and one barrel of diesel from three barrels of crude.

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As of Wednesday, it stands around $57 a barrel, near all-time highs.

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Still, the good times can’t last forever. “These refining stocks are on stilts right now,” said Ben Cook, a portfolio manager at Hennessy Funds who oversees two energy-focused funds. A clear end to the US-Iran conflict would likely lead to a sharp drop in share prices for top US refiners such as Phillips 66 and peers Marathon Petroleum Corp. and Valero Energy Corp., he said.

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“They’re crazy numbers,” Cook said of sky-high fuel-making margins. “But they can easily slip backwards.”

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