Where to start
Executives from Phillips 66 (PSX.US), a major U.S. oil and gas company, recently indicated that producers of refined fuels, currently enjoying surging profits, are likely to maintain exceptionally strong margins through the next quarter and beyond. The current global refining boom is fundamentally driven by a 'refined product supply gap' rather than being purely a crude oil price-driven rally. Key metrics such as refinery utilization, cracking spreads, energy export demand, and cash flow growth are all strengthening in tandem, not just reflecting isolated outperformance by individual energy companies.
Brian Mandell, Phillips 66's executive vice president of marketing and commercial business, stated during a Wednesday earnings call that supply disruptions from the Iran conflict are expected to impact global refining operations, particularly for gasoline and diesel, until 2027. Mandell noted, "The refining fundamentals are very tight, and they are getting tighter." He added that there is a daily shortfall of 7 million barrels of refined products in the Middle East and Asia, with an additional 1.4 million barrels per day gap in Russia. "This really sets the stage for potentially stronger margins in Q3 and the rest of next year," Mandell emphasized.
The latest earnings data shows the independent U.S. refiner posted adjusted earnings per share of $9.14 for the second quarter, a record high since its 2012 initial public offering. The company's actual refining margin more than doubled year-over-year to $24.08 per barrel. Net income was approximately $3.85 billion, up from $877 million in the same period last year, marking its highest quarterly profit since 2022, when the Russia-Ukraine war disrupted global supply chains and boosted refiner earnings.
In the months following U.S. and Israeli strikes on Iran, refining margins have broadly surged for both refiners and integrated giants like Exxon Mobil. Supply losses from the Middle East and refinery outages in Ukraine due to Russian attacks have further tightened global refined product supply. As of Thursday, August 6, 2026, the geopolitical landscape in the Middle East shows a tug-of-war between rising hopes for a Strait of Hormuz de-escalation and the continued spread of Red Sea risks. Iran and Oman have indicated that a draft agreement on Strait of Hormuz shipping routes is in its final stages, potentially granting Iran control over vessels entering the Persian Gulf contingent on the U.S. lifting its blockade of Iranian ports, a core term the U.S. has yet to accept. Meanwhile, the Houthi group has claimed attacks on two Saudi oil tankers near Yanbu port in the Red Sea and in the Gulf of Aden, though this has not been confirmed by Saudi Arabia. Israel has also resumed airstrikes on southern Lebanon, prematurely ending local ceasefire talks. Consequently, the latest geopolitical events cannot yet be classified as confirmed large-scale production cuts, but they have extended risks from Hormuz to the Bab el-Mandeb Strait and Red Sea alternative export routes, limiting market optimism towards a peace deal.
Why refining margins are hitting historic highs
As the Middle East geopolitical conflict continues, operators of strategic petroleum reserves globally have been releasing refined product stockpiles to address Middle East supply shortages. These reserves now need replenishment, further strengthening the demand outlook. Mandell stated that the geopolitical war might also prompt nations to build new reserves to "guard against such geopolitical issues."
Phillips 66 CEO Mark Lashier told media on Wednesday, "We're hearing discussions taking place, with some countries considering building their own reserves, both for crude and refined products." He added, "But these countries are also looking at the U.S. as a more reliable source of both crude oil and refined products." While reserve releases have buffered supply shocks, some refiners have also reduced their reliance on Middle Eastern oil and popular crude grades. Lashier noted that less than 1% of the crude processed by Phillips 66 refineries now comes from the Middle East. As global crude prices surged during the conflict, the company redirected large volumes of U.S.-produced light crude to its East Coast refinery to replace imported crude. Regarding the Bayway refinery in Linden, New Jersey, Lashier said, "If we had to process those crude grades at the prices then available, we would have had to shut Bayway down." Phillips 66 has also been seeking alternative crude supplies in Latin America, and Mandell told analysts the company is now the world's third-largest buyer of Venezuelan crude.
Mandell stated that the company's refineries are deferring maintenance to capture high margins, although further delays could lead to unplanned long-term shutdowns. Significant maintenance work is required in 2027 and 2028, which will likely remove more refined product supply from the market around 2027. Mandell also highlighted structural constraints in the refined fuel market: reopening the Strait of Hormuz would increase crude supply but not significantly boost refined product supply in the short term, while net global refining capacity additions will be insufficient to meet expected demand growth.
Why just 10 ASX 200 shares?
A key refinery profitability indicator, known as the '3-2-1 crack spread,' hit a record high in July. This metric calculates the average profit margin per barrel from processing three barrels of crude into two barrels of gasoline and one barrel of diesel. As of Wednesday, the spread was around $57 per barrel, near its all-time high. However, such good times may not last indefinitely. Ben Cook, a portfolio manager at Hennessy Funds overseeing two energy-themed funds, commented, "These refining stocks are like walking on stilts right now." He suggested that if the U.S.-Iran conflict were to end decisively, shares of Phillips 66 and other major U.S. refiners like Marathon Petroleum and Valero Energy could fall sharply. Referring to the unusually high refining margins, Cook said, "These numbers are staggeringly high, but they can also come down very quickly."
Phillips 66's second-quarter adjusted refining profit surged to $3.09 billion from $392 million a year earlier, with actual refining margins more than doubling to $24.08 per barrel. Exxon Mobil, the largest U.S. oil and gas giant, reported adjusted energy products profit of $4.099 billion, setting a record for second-quarter diesel production. Chevron's downstream earnings reached $4.9 billion, the highest since the 2020s, with its U.S. refinery throughput exceeding 1 million barrels per day for the first time. Saudi Aramco, the state-owned energy giant headquartered in Saudi Arabia, posted a 44% year-on-year increase in second-quarter net profit to $32.69 billion, also benefiting from higher refined product and chemical prices, and warning that global refineries are operating near maximum capacity with little buffer to absorb unexpected outages. The highly consistent signal from these energy giants' earnings reports is clear: refinery utilization, cracking spreads, export demand, and cash flow are all strengthening in tandem, not just reflecting isolated surprises from individual companies.
A closer look at the super-cycle's potential
The reason this cycle could extend to 2027 is that the global shortage has evolved from a 'crude oil shortage' to a more difficult-to-repair 'shortage of refining capacity and qualified refined products.' Even if the Strait of Hormuz reopens, the initial increase will be in crude supply, which cannot immediately compensate for diesel, jet fuel, and gasoline. Meanwhile, attacks on Russian refineries, constraints on Chinese refined product exports, declining global inventories, and disruptions to Middle Eastern refineries and shipping have all compressed available supply. To capture high profits, refineries are deferring maintenance, but operating at ultra-high loads increases the probability of unplanned outages. Furthermore, the backlog of maintenance due in 2027-2028 will actively remove capacity when it is finally addressed. Consequently, large U.S. refiners with complex refineries, flexible feedstock configurations, and complete export terminals on the Gulf Coast are becoming marginal suppliers in the global refined product market. Phillips 66's plan to run at approximately 95% utilization in the third quarter is a direct reflection of this tight balance.
However, none of this guarantees a risk-free, long-term compounding rally for refining stocks. Instead, it represents a super-cycle with extremely strong earnings, supported by the scarcity of refined products, but with a highly concentrated reversal trigger. Refining stocks still offer powerful catalysts for upward earnings revisions, free cash flow, and deleveraging. Large refiners like Phillips 66, Valero Energy, and Marathon Oil typically have higher sensitivity to cracking spreads than integrated energy giants. However, this is also a trade with high geopolitical beta and strong mean-reversion characteristics. The mere progress in Iran-Oman talks on Thursday caused Brent crude to fall back to around $79.08, demonstrating the market's acute sensitivity to Middle East ceasefire signals. If the Strait of Hormuz stabilizes, Middle Eastern and Russian refineries recover, and inventory replenishment is completed, cracking spreads and refining stock valuations could correct quickly, potentially ahead of earnings declines. Conversely, if Red Sea shipping routes remain under attack, maintenance backlogs begin to materialize, and Middle Eastern producers experience further unexpected outages, the probability of refining margins remaining elevated until 2027 will significantly increase.