Phillips 66 (PSX) CEO Mark Lashier contends a Middle East ceasefire won’t be enough to fix oil markets. The damage to the global energy system is already done.
“It will be difficult. It will be timely,” Lashier told Yahoo Finance at the Semafor World Economy Summit. “You’ll have to redesign things. Build things to repair.”
He added that the “tail effect” will haunt the markets for months, if not years. “Some of it will come back quickly. Some of it will take longer,” he said.
Crude oil (CL=F) tumbled about 7% on Tuesday to about $92 per barrel after recently flirting with $120. The recent price drop still leaves it about 30% above the $70 to $80 per barrel range in the months before the conflict.
The current dip suggests a cooling geopolitical premium, but it masks a supply nightmare: Roughly 20% of the world’s crude oil and liquid natural gas transits the Strait of Hormuz. When the flow stops, the world cannot simply pivot.
“It’s incredibly disruptive,” Lashier said. “The world has become very integrated and very efficient.”
Read more: What an extended war with Iran could mean for gas prices
While Saudi Arabia and the UAE can move oil via their respective pipelines, roughly 12 million barrels a day are effectively trapped. “I don’t think we’ve seen the full impact of that disruption yet,” Lashier cautioned. Inventories are depleted. In Asia, refineries are already cutting production to conserve what little they have left.
The result is a massive logistical shift. Asian buyers have been forced to aggressively acquire North American and Atlantic Basin crudes to fill the void. This global reshuffling is expensive, inefficient, and likely permanent.
Phillips 66 has felt the heat, with its stock down 8% over the past 30 days. In the past year, however, the shares have risen by roughly 62%.
Read more: How to protect your money as Mideast turmoil fuels market volatility
In a recent report, JPMorgan analyst Zach Parham suggests Phillips 66 is positioned for a “structurally” tighter market. JPMorgan pointed to global demand for gasoline and diesel outstripping new supply, issuing an Overweight rating and a $154 price target.
Essentially, Phillips plans to make money by betting on a fuel shortage. While global refinery capacity is growing by 1.1 million barrels per day, JPMorgan noted that only a small fraction is designed for transportation fuels like gasoline or diesel.
The rest is earmarked for petrochemicals. Phillips 66, which produces gasoline and jet fuel, will benefit from fuel production failing to keep up with global demand. As supply drops and demand stays high, the company’s profit margins per gallon stand to go up.
