Phillips 66 sees wider crude quality differentials going forward

Phillips 66's record second-quarter chemical results were countered by poor refining segment results, due in part to high RINs costs, weak market capture and narrow light-heavy crude differentials, company executives said Aug. 3.

Phillips 66 ran its refineries at 88% of capacity in the second quarter, up from first quarter's 74%, but posted lower margin capture quarter on quarter on its distillate-focused refinery configuration, CFO Kevin Mitchell said during a call to discuss Q2 results..

"Realized margin was $2.92/b and resulted in an overall market capture of 22%," Mitchell said. During the third quarter, the company will run at rates dictated by market conditions, he added.

First quarter refinery margin capture was 33%, Mitchell said.

"Market capture is driven by the configuration of our refineries," he said. "Our refineries are more heavily weighted to distillate production than the [3:2:1 crack] market indicator."

During the quarter, the gasoline crack improved $5.68/b, while the distillate crack increased only improved by $2.20/b.

Also, Phillips 66 had "quite a bit of planned FCC downtime this year," CEO Greg Garland said, putting downtime at about 2% of the company's gasoline-making fluid catalytic cracking capacity, further reducing gasoline output and lowering margin capture

However, Garland said that the RIN-adjusted crack – which does not include the cost of compliance credits for the Environmental Protection Agency's Renewable Fuel Standard – needs to get back to the $12/b to increase market capture to take advantage of rising demand as the coronavirus pandemic lockdowns ease.

Wider crude differentials, more refinery shutdowns

The increase in heavier crude supply, due in part to higher production quotas agreed by OPEC+ members, will benefit distillate-heavy Phillips 66. The company, which runs a lot of heavy crude, will benefit from the widening of light-heavy crude differentials.

"For the second quarter, it was a gasoline-driven market without much differential on heavy crude," said Robert Herman, Phillips 66's head of refining. "We've seen those widen out here now in July to a much more respectable level."

So far in the third quarter, US light sweet Gulf of Mexico benchmark Light Louisiana Sweet is holding a $2.59/b premium to US Gulf of Mexico medium-sour Mars, according to S&P Global Platts assessments.

This compares with the $2.04/b and $1.58/b premium held in the second and first quarters, respectively.

On the supply side, Phillips 66 expects to see some uplift in margins as refinery rationalizations continue across the globe.

"We are seeing refinery rationalizations – 3.7 million b/d of announced closures, 800,000 b/d of temporary outages which could become more permanent," said Jeff Dietert, head of investor relations. "And we're are up to about 1.7 million b/d of capacity that's been announced as considering either terminals or potential shutdown."