Phillips 66 looks for summer fuel comeback: Update

Adds detail from call.

A solid summer demand season should lead to a recovery in discounts on heavy and sour crudes and a restoration of refining margins, US independent refiner Phillips 66 said today.

A rising pace of vaccinations and better control of the Covid-19 pandemic could help restore demand for the summer driving season, Phillips 66 executive vice president Bob Herman said during a quarterly earnings call. But refiners will wait for demand to pull higher utilization rates, he said.

"We will be following the market to add capacity back," Herman said. "Certainly by summer we would expect that a good portion of the American public is able to get out and burn the fuels that we make, and that should lead to a more normal-type summer level."

US refiners have restrained crude processing rates despite encouraging signs of fuel demand to open this year. Total crude throughputs at US refineries last week averaged 13pc lower than than prior year levels, and 14pc lower than the same week of 2019.

US fuel stockpiles have come down to more normal ranges, as well. Implied gasoline demand has averaged within about 10pc of prior year demand, while diesel demand has at times already exceeded prior year consumption. Rising gasoline futures encourage supplying prompt demand instead of storing up for summer, refiners have said.

Low throughputs magnify otherwise small relative costs in fuel distribution and refinery operations. Compressed demand has also cut oil production, narrowing the spreads between light crudes and the typically cheaper heavy feedstocks many US refiners have invested to process.

Fuel demand recovery should pull both utilization and oil production higher, Herman said. That should restore crude discounts in the second half of this year.

"Those will all play out together," Herman said. "That is really how we get back to high utilization rates and more profitability."

Narrowing gap

Phillips 66 narrowed its refining losses in the final three months of 2020 despite losing money in the US Gulf coast for the second consecutive quarter.

Hurricanes that hammered Louisiana and continued low global fuel demand reduced the US independent refiner's global refinery utilization to 69pc in the fourth quarter of 2020, down from 77pc in the previous quarter and 97pc in the fourth quarter of 2019. The company's refining segment reported a $1.1bn loss for the fourth quarter, compared with $1.9bn in the third quarter.

Phillips 66's US Gulf coast refineries ran at 371,000 b/d — less than half of its capacity in the region and the company's lowest throughput there since the refiner was formed in 2012. The US Gulf coast refineries reported a net realized 78¢/bl loss for the quarter, down from a 61¢/bl loss in the second quarter and $7.45/bl gain in the fourth quarter of 2019.

The quarter included extended downtime at Phillips 66's 250,000 b/d Alliance refinery in Belle Chasse, Louisiana, which resumed operations at the beginning of the year. Production of gasoline and diesel in the region both sank, while unfinished and other refinery outputs made up a larger share of Phillips 66's US Gulf coast production in the the quarter.

Atlantic coast refining margins fell by 58pc compared with the prior year — the smallest drop of any region. Phillips 66 throughputs there averaged 87pc, supported by shutdowns at other regional refineries.

Phillips 66's midstream profit increased to $223mn in the quarter, up from $146mn in the third quarter but short of the $405mn reported in the fourth quarter of 2019. Marketing and chemicals segments were also profitable, though weaker than in the third quarter.

By Elliott Blackburn