Phillips 66 optimistic on US refining in 2022

US independent refiner Phillips 66 is optimistic about US refining economics in 2022, citing easing concerns over the Covid-19 pandemic and a less crowded field of competitors.

Governments may prove less likely to impose lockdowns this year as the Covid-19 pandemic wanes, even amid a recent increase in infections, Phillips 66 chief executive Greg Garland told an investor conference this week.

"I think if you looked at each successive wave, Covid has had less impact on demand," Garland said during the Goldman Sachs Energy and Clean Technology Conference. "I actually feel like we're moving more to an endemic phase versus a pandemic phase."

The effect of "unleashed pent-up demand" should support refining industries in 2022, as evidenced by gasoline and distillate demand levels that trended above 2019 levels at some points late last year. Implied demand for US gasoline averaged 9.1mn b/d in the four-week period ending 31 December, compared to 7.9mn b/d in the same period in 2020 and 8.9mn b/d in the same period in 2019, according to data from the US Energy Information Administration.

On the supply side, Phillips 66 faces a narrower field of US refining competitors following a number of rationalizations in recent years. The idling or conversion of around 4.5mn b/d in US refining capacity outpaces additions made across 2019, 2020 and 2021, supporting refining margins for US refiners able to keep units running.

Fourth quarter 2021 refining margins were "pretty good" and set the company up for strong cash generation this year, Garland said. US Gulf coast 3-2-1 crack spreads averaged $16.87/bl in the quarter, compared to $7.07/bl in the same period in 2020 and $11.70/bl in the same period of 2019, although historically high renewable fuel blending compliance costs likely ate into some of that margin growth.

Changing slates

Jet fuel was the laggard in the refining industry's recovery from the Covid-19 pandemic last year, but Phillips 66 is optimistic that the aviation industry will continue an upward swing this year, despite a chaotic holiday travel period in which airlines struggled to maintain staffing levels amid widespread Covid-19 infection among workers.

"Notwithstanding all the scenes we saw at the airports over the holidays, that wasn't people that didn't want to travel, that was flight crews and weather that impacted that," Garland said. "And so, I think we're going to see a continued improvement and recovery in jet demand as we move into 2022."

Strong demand for gasoline in 2021 and lower demand for jet fuel incentivized refiners to increase gasoline production and cut down on the pool of distillate products. But the company expects its refineries will revert back to producing more distillate as jet fuel demand recovers this year.

"I think as we look at our portfolio, we're more diesel heavy than our peers," said Phillips 66 investor relations head Jeff Dietert. "As diesel demand continues to grow and jet demand comes back, we expect to revert back to an environment where diesel cracks are $5/bl higher than gasoline cracks and we will see that benefit in our portfolio."

That diesel-heavy refining portfolio should also benefit from the return of more heavy sour barrels from Opec+ producers in 2022.

"The other thing that we've seen relative to our portfolio versus peers is that with Opec taking heavy sour barrels off the market, that heavy-sour discount moderated in 2020 and 2021," Dietert said. "We're seeing it starting to widen back out as Opec puts more barrels into the market, and we think they're going to put 2mn-3mn barrels a day more in 2022."

Phillips 66 reports fourth quarter financial earnings on 28 January.

By Dylan Chase