The crude oil supply crisis has escalated into a "refined oil shortage"! The crack spread operates at historic highs, and the global refining bull market is expected to continue until 2027.

One of the major oil and gas giants in the United States, Phillips 66 (PSX.US), recently indicated that it is enjoying soaring profits as a refining fuel producer, which is likely to continue to see exceptionally strong profit margins in the next quarter and beyond. The current global refining environment remains on an upward trajectory, driven fundamentally by a gap in refined oil supply rather than merely high crude oil prices. Refinery utilization rates, crack spreads, energy export demand, and cash flow growth are all strengthening in tandem, rather than being the happenstance outperformance of individual energy companies. Brian Mandell, Executive Vice President of Marketing and Business at Phillips 66 (as noted above), stated during an earnings call on Wednesday that the supply disruptions caused by the Iran conflict are expected to continue impacting the global refining business, particularly in markets for refined fuels such as gasoline and diesel, until 2027. Mandell commented, The refining fundamentals are very tight and are becoming even tighter. He added that the Middle East and Asian markets are facing a daily shortfall of seven million barrels of refined oil, with an additional 1.4 million barrels per day supply gap in the Russian market. This indeed lays a foundation for potentially stronger profit margins in the third quarter and for the rest of next year, Mandell emphasized. Latest performance data shows that this U.S. independent refiner's adjusted earnings per share reached $9.14 in the second quarter, setting a record since the companys initial public offering in 2012. In the second quarter, its actual profit margin more than doubled year-on-year to $24.08 per barrel. The company's net profit 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 refinery profits. In the months following the U.S. and Israeli attacks on Iran, refining business profit margins for both refiners and oil and gas giants like Exxon Mobil Corporation soared significantly. The loss of supply from the Middle East and the refining shutdowns resulting from the attack on Russian facilities tightened the global supply of refined petroleum products further. As of Thursday (August 6, 2026), the political situation in the Middle East is characterized by a dual pull of rising expectations of de-escalation in the Strait of Hormuz and continued dispersion of risks in the Red Sea. Iran and Oman have indicated that agreements regarding the shipping routes through the Strait of Hormuz are in the final drafting stages, with potential arrangements that may grant Iran control over vessels entering the Persian Gulf, contingent on the U.S. lifting its port blockades against Iran, although the U.S. has not yet accepted this core term. Meanwhile, Houthi rebels claim to have attacked two Saudi oil tankers near the Red Sea port of Yanbu and in the Gulf of Aden, although this has not been confirmed by Saudi sources; Israel has also resumed airstrikes in southern Lebanon, effectively ending local ceasefire negotiations early. Therefore, the latest political events involving Middle East GEO Group Inc have not yet been characterized as confirmed large-scale new production cuts, but they have extended risks from the Strait of Hormuz to the Bab-el-Mandeb Strait and alternative export routes in the Red Sea, limiting market optimism regarding a peace agreement. Refining profits have soared to historic highs: Phillips 66 bets on high oil product spread continuing until 2027. As the political conflicts involving Middle East GEO Group Inc persist, operators of strategic petroleum reserves across multiple countries have been continuously releasing refined oil inventories to address shortfalls in Middle Eastern supply. Now, these reserves need replenishment, further reinforcing demand outlooks. Mandell noted that this GEO Group Inc political war could also prompt countries to establish new reserves to guard against such GEO Group Inc political issues. Phillips 66 CEO Mark Lashier stated in a media interview on Wednesday, We have heard discussions are ongoing, and some countries are considering establishing their own reserves, which include both crude oil and refined products. He added, However, these countries are also viewing the U.S. as a more reliable supplier of refined products and crude oil. Although inventory releases have buffered the energy market from supply-side shocks, some refiners have been able to reduce their dependence on refined oil products and popular crude grades from the Middle East. Lashier remarked that the proportion of crude oil processed at Phillips 66 refineries from the Middle East is less than 1%. As global crude oil prices soar during the geopolitical conflicts involving Middle East GEO Group Inc, the company has been significantly supplying its East Coast refinery with U.S.-manufactured light crude oil to replace imported crude. Discussing the Bayway refinery located in Linden, New Jersey, Lashier stated, If we had to process those crude grades at the prices prevailing at the time, we would have to close the Bayway refinery. Phillips 66 has also been seeking alternative crude supply sources in Latin America. Mandell mentioned on an analyst call that the company has become the world's third-largest buyer of Venezuelan crude oil. Mandell indicated that the companys refineries are delaying maintenance to capture high profits, while continued postponement of repairs may lead to unplanned long-term shutdowns. Related facilities will require extensive repairs in 2027 and 2028, at which time more refined oil supply forces are expected to withdraw from the market. Mandell noted that the refined fuel market also faces structural constraints. The reopening of the Strait of Hormuz will increase crude oil supply but is not expected to significantly boost refined oil supply in the short term; meanwhile, the net addition of global refining capacity will be insufficient to meet anticipated demand growth. U.S. refineries have taken over global marginal supply, entering a super cycle for refining profits. A refining profitability metric known as the "3-2-1 crack spread" reached an all-time high in July. This spread is derived by calculating the average profit margin per barrel when processing three barrels of crude oil into two barrels of gasoline and one barrel of diesel. As of Wednesday, this metric was around $57 per barrel, nearing its historic peak. However, good times cannot last forever. Ben Cook, a portfolio manager managing two energy-themed funds at Hennessy Funds, remarked, These refining stocks currently feel like they are walking on stilts. He noted that if the conflict between the U.S. and Iran were to definitively end, the stock prices of Phillips 66 and other large U.S. refiners like Marathon Oil and Valero Energy Corporation could significantly decline. Regarding the exceptionally high refining profit margins, Cook stated, These numbers are astonishingly high, but they can also drop quickly. The adjusted profit for Phillips 66s refining business in the second quarter surged from $392 million in the same period last year to $3.09 billion, with the actual refining profit margin crazy high at $24.08 per barrel, more than doubling compared to the previous year; the biggest U.S. oil and gas giant, Exxon Mobil Corporation, reported an adjusted profit of $4.099 billion for its energy products business, achieving a record in diesel production for the second quarter; Chevron Corporation's downstream profits reached $4.9 billion, the highest level since the 2020s, while U.S. refining throughput surpassed one million barrels per day for the first time. The state-owned energy giant Saudi Aramco, based in Saudi Arabia, reported a net profit growth of 44% year-on-year to $32.69 billion in the second quarter, similarly benefiting from rising refined oil and chemical prices, warning that global refineries are nearing maximum capacity with almost no margin to accommodate new unexpected shutdowns. The consistent signals from these energy giants financial reports undeniably affirm that the utilization rates of refineries, crack spreads, export demand, and cash flows are all strengthening in tandem, rather than being the happenstance outperformance of individual businesses. The potential for this cycle to extend until 2027 arises from the transformation of the global shortage from being "short on crude oil" to a more challenging "short on refining capacity and qualified refined products." Even if the Strait of Hormuz were to reopen, the first increase would be in crude oil supply, not immediately compensating for the shortages in diesel, jet fuel, and gasoline; meanwhile, attacks on Russian refineries, restrictions on Chinese refined oil exports, declining global inventories, and impediments to Middle Eastern refineries and shipping have collectively compressed the supply that can be mobilized. In pursuit of high profits, refiners are delaying maintenance, but operating equipment under ultra-high loads increases the probability of unplanned shutdowns, and when maintenance is piled up and concentrated releases occur in 2027-2028, capacity will also be withdrawn actively. Therefore, large U.S. refiners such as Phillips 66, with complex refineries, flexible raw material structures, and complete export terminals along the Gulf Coast of the United States, are becoming the marginal suppliers in the global refined oil market; Phillips 66 plans to operate at approximately 95% utilization in the third quarter, directly reflecting this tight balance. However, this does not imply that an extended risk-free long-term trend of compounding in refining stocks is on the horizon; rather, it signifies a super cycle supported by the scarcity of refined oil, strong profitability, but with a highly concentrated risk of reversal. Refining stocks still possess strong earnings revisions, free cash flows, and deleveraging catalysts, with large refiners like Phillips 66, Valero Energy Corporation, and Marathon Oil Corporation typically exhibiting higher crack spread elasticity than giants like SES AI Corporation Class A; yet, this is also a trade characterized by high geopolitical beta and strong mean-reversion properties. On Thursday, Brent crude fell to about $79.08 simply due to the progress in Iran-Oman negotiations, indicating that the market is extremely sensitive to signals of ceasefires in the Middle East. If stability returns to the Strait of Hormuz, Middle Eastern and Russian refineries resume production, and inventory replenishment is completed, crack spreads and the valuations of refining stocks may quickly decline ahead of earnings reports. Conversely, if attacks on Red Sea shipping routes persist and maintenance backlogs begin to overlap with unexpected shutdowns among Middle Eastern oil and gas producers, the likelihood of refining profits continuing at high levels until 2027 will significantly increase.