Oil Market Report – November 2022

The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East and India away from their traditional buyers. Increased refinery capacity will eventually help ease diesel tensions. However, until then, if prices go too high, further demand destruction may be inevitable for the market imbalances to clear.



The IEA expects more output
from the U.S., Canada, Brazil and Guyana to make up for most
of the additional oil that is needed. OPEC+ output is expected
to remain flat or slightly down as increases in core OPEC are not
expected to compensate for the declines in Russian production.

OPEC only expects a 400,000 b/d reduction in Russian output over
the next 6 months. In contrast, the IEA expects Russian production to decline
by 1.2 Mb/d as the EU implements its ban on seaborne oil purchases.

Phillips 66 (PSX) Q4 2021 Earnings Call


Important quotes:

We’d like to resume share repurchases this year and on our path toward getting back to pre-COVID debt levels over the next couple of years.

We recently signed a technical development agreement with NOVONIX to accelerate the development of next-generation materials for the U.S. battery supply chain. We own a 16% stake in the company, extending our presence in the battery value chain.

We ended 2021 with a net debt-to-capital ratio of 34%.

During the year, we paid down $1.5 billion of debt. In November, both S&P and Moody’s revised their outlooks from negative to stable. We are committed to further deleveraging as we continue to prioritize our strong investment-grade credit ratings. We funded $1.9 billion of capital spending and returned $1.6 billion to shareholders through dividends.

Our ending cash balance increased to $3.1 billion.

Crude utilization was 90% in the fourth quarter and clean product yield was 86%.



In chemicals, we expect the first quarter global O&P utilization rate to be in the mid-90s. In Refining, we expect the first quarter worldwide crude utilization rate to be in the high 80s and pre-tax turnaround expenses to be between 120 and $150 million. We anticipate first quarter corporate and other costs to come in between 230 and $250 million pre-tax. For 2022, we plan full year turnaround expenses to be between 800 and $900 million pre-tax.

So I think coming into April, we’re going to pay another 1.5 billion-ish of debt off in April as it comes due. So that’s three of the 4 billion. We’ve made a big dent in that.

Some steel producers think it will continue to increase, some think it’ll come off. Either way, we’ve seen good demand from both steel producers and anode producers, and we expect that market to continue to gradually increase.

What we see with each successive wave of COVID, the impacts to demand are less and less. And so I’m not sure when that moment in time as we transition from pandemic to endemic but that could happen next year. But regardless, we see the demand impacts less and less from each successive wave of COVID. Prior to the current variant, we were seeing gasoline demand kind of back at 2019 levels.

There’s disciplined demand above 2019 levels. Jet was recovering nicely. So as we move into 2022, we’re constructive around the demand side. We talked about the turnaround activity and what impact that could have ultimately on utilizations.

I think we paid 3 billion of the 4 billion that we borrowed during 2020 down. I think that demonstrates our commitment to paying down debt and returning the balance sheet over a couple of year periods to something that resembles kind of pre-COVID levels of, say, 12 billion on a consolidated basis. So I think we’re pretty comfortable in that construct, Roger.

 So I think high natural gas prices are going to continue for a while in Europe, and it is really going to strain kind of that bottom quartile of refiners that are left.

Q: I was looking back at your share price, it seems like a horrible memory now but your share price pretty much got cut in half twice last — during the 2020 period.

And obviously, you did not buy back stock when that happened, given the circumstances. So my question is why carry $10 billion of net debt rather than work the balance sheet down to a level where we know these corrections are going to happen occasionally in this business to allow you to take advantage of that?

A: Yes, Doug, I think it’s really a — it is a bit of a balancing, trying to meet multiple priorities. So we think about an optimum capital structure in terms of cost of capital, right? So too little debt is increasing cost of capital, and so you’ve got that component to it. 

When you look at last year, it was the first year in at least 30 years where there was more capacity rationalized out of the global fleet than there was capacity added. And so we are seeing that benefit.

The years 2003-2008 experienced periods of very strong economic and oil demand growth, slow supply growth and tight spare capacity


Our goal is to be able, at some point, to get the entire 50,000 barrels of diesel that we make to the end user. That may not be possible but we’ll see.

Q: hink in the past that you’re sort of looking at long-term capex in the range of two and a half to 3 billion kind of range, that talking about 1 to $2 billion of the — maybe the growth capex. Since then, of course, that the outlook for the investment opportunity in the midstream has changed, so you’re probably not going to spend that much money. So once that your debt is back to a comfortable level and you start to be more in the growth phase, what is the capital allocation we should look at on the longer-term basis?



U.S. oil refiners are doing well, even though gasoline prices are down

Remember: 60% of gasoline prices are determined by the price of crude oil, and 25% is the refining, distribution and marketing of that oil — in other words, the crack spread.

 Crack spreads widen when anything disrupts refining capacity. 

Jeff Barron is an economist at the U.S. Energy Information Administration. He said that historically, we’ve seen this when a hurricane hits Texas and Louisiana and knocks some refineries offline. Some of them never come back.

“So those refiners that, let’s say, do not get affected by a hurricane in those time periods, they receive higher revenues because they are able to meet the demands of their customers,” Barron explained.