INTERVIEW: Phillips 66 sees distillate margins remaining strong through end-2025

Phillips 66 expects distillate margins to remain strong on low inventories through year-end despite refiners favoring distillate production over gasoline.

"Ultra low sulfur diesel inventories remain very low heading into the harvest season in the Midwest and heating oil season in the Northeast," said Brian Mandell, head of Phillips 66's commercial and market operations, in a recent interview.

Phillips 66 is the fourth-largest refiner in the US, with a total of 1.313 million b/d of crude processing capacity spread among seven refineries. It is also a key provider of distillates, particularly from its US Central Corridor refineries.

The region currently accounts for about one-third of Phillips 66's US crude refining capacity, which will increase by over 200,000 b/d as Phillips 66 takes full ownership of the Wood River, Illinois, and Borger, Texas, refineries from partner Cenovus at year-end.

"Refiners have been producing as much distillate as they can," Mandell said. "We would expect distillate margins to remain strong through the end of the year, with planting season, hurricane season, we have fall turnarounds coming up, and then we have winter demand after that."

ULSD crack spreads have been strong on tight supplies. The NYMEX front-month ULSD crack against WTI was trading at $35.93/b midday Sept. 25, up $1.43 on the day and up from roughly $25/b in mid-June.

In contrast, the NYMEX front-month RBOB crack against WTI was trading around $17.22/b midday Sept. 25.

US Energy Information Administration data shows that US distillate stocks at 123 million barrels the week ended Sept. 19 were 2% above the five-year average, having risen from a 23% deficit in early July. However, stocks at 30.1 million barrels were 22% below the five-year average on the US Atlantic Coast, home of the New York delivery point for the NYMEX ULSD contract.

Refining margins in Phillips 66's Central Corridor averaged $15.61/b in Q2 2025, compared with $12.75/b in Q2 2024, according to the company's Q2 results.

Mandell said the tight distillate market is putting pressure on gasoline margins as refiners maintain "full distillate tilt" even during the traditional gasoline driving season.

Phillips 66 sees potential relief coming from additional OPEC production, weakening fuel oil values, increased Canadian heavy crude production, and possible exports from the Middle East and India.

Integration approach boosts margins

Phillips 66 has cut costs and increased efficiencies along the value chain of its diverse assets through the integration of its refinery, pipeline, and petrochemical operations, helping to boost margins, Mandell said.

Global refining margins averaged $11.25/b in Q2 2025, up from $10.01/b in Q2 2024, due to improved crack spreads, higher volumes and lower costs. US marketing fuel margins averaged $2.83/b in Q2 2025, up from $1.70/b in Q2 2024.

"The key word there is integration," Mandell said.

The integrated strategy has been central to CEO Mark Lashier's leadership since taking over in 2022, successfully defending against Elliott Management's breakup proposal by arguing that long-term synergy value outweighs short-term separation gains.

Phillips 66 has expanded its commercial trading organization by 30% since 2023. The integrated energy company leverages market volatility, much of which arises from geopolitical events, to drive earnings growth.

"We're leveraging advanced analytics, including AI, risk management, portfolio optionality, and ultimately our market insights and agility to help optimize every single barrel every single day," Mandell said.

The Houston-based company now employs about 120 traders and originators across offices in Houston, Calgary, London, Singapore and Beijing, as it seeks to capture more integration value across its refining, petrochemicals, natural gas liquids and renewable fuels businesses.

The commercial organization, which totals about 500 people excluding trucking operations, trades over 3 million barrels b/d of crude oil, 2 million b/d of clean products and 1 million b/d of NGLs globally.

Softer renewables markets

Phillips 66, which converted its Rodeo, California, refinery to a renewable fuels facility, is now facing slowing demand and changing policy mandates for renewable diesel and sustainable aviation fuel.

The company's Rodeo Renewable Energy Complex operates at around 30,000-35,000 b/d, compared with its 50,000 b/d capacity, due to regulatory uncertainties affecting renewable fuels margins. Mandell cited the 45Z tax credit's limitations on eligible feedstocks and reduced premiums for SAF as headwinds.

Mandell said he expects the facility to continue reduced operations through the third and possibly fourth quarters. According to its most recent data, Phillips 66's renewable diesel indicator for August is averaging 24 cents/gal, well below 2024's average $1.13/gal.

Changing California fuels landscape

Phillips 66 is shuttering its other California refinery, with expectations that the Los Angeles-area plant shutdown will be completed by the end of this month.

As a result, Phillips 66 has significantly increased gasoline imports into California, ahead of the shutdown of the Wilmington refinery.

The shutdown of Wilmington has intensified Phillip 66's imports of California Air Resources Board compliant gasoline into the state as well as adding CARBOB-compliant producing capability at its Ferndale, Washington, refinery.

Thanks to the company's expanded commercial organization, Phillips 66 can now blend CARB gasoline by sourcing components globally through six blending locations spanning Asia, Europe and the Caribbean. This geographic diversification provides supply flexibility and helps mitigate regional supply disruptions that have historically caused price spikes in the California market.

Phillips 66's ability to produce CARB gasoline domestically at Ferndale, combined with its global blending capabilities, positions the company to capitalize on a more stable pricing environment similar to the US Atlantic Coast, where large import volumes help smooth price volatility following a spate of refinery closures 15 years ago.

The integrated approach extends beyond traditional refining operations. At the company's Bayway refinery in Linden, New Jersey, a polypropylene unit connects directly to refining operations.

And at its Sweeny complex in Texas, Phillips 66 has co-located its CPChem chemicals operations with refining and logistics infrastructure, creating operational synergies through shared feedstocks and integrated supply chains.