Impact of Middle East Geopolitical Events on Phillips 66 Q1 2026

Q1 2026: How Middle East geopolitical events affected commodity prices and Phillips 66 margins

1) Impact on commodity prices: “unprecedented volatility” and tighter physical balances

• Management explicitly links the quarter’s commodity-price behavior to Middle East geopolitical events, stating they “drove unprecedented commodity price volatility during the quarter”. ¹
• They quantify the magnitude of price dislocations: March was the first month where price moves in major crude oil, refined product, and European natural gas benchmarks exceeded the 95th percentile. ¹
• They further connect this to structural disruptions: “Due to the closure of the Strait of Hormuz,” a “significant amount of global refining and petrochemical capacity is down.” ¹
• The company also points to market structure effects that typically widen price spreads and differentials: “The differentials between global indices and physical markets have spiked and forward markets are heavily backward dated,” reflecting “tight global crude oil balances”. ²

Bottom line on commodities: Middle East-driven disruptions increased volatility, tightened global crude/product balances, widened crude/product differentials, and created heavier backwardation—conditions that tend to move refinery/chemistry economics quickly and unevenly across regions. ¹²

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2) Impact on Phillips 66 margins: mostly constructive for refining economics, but earnings were distorted by mark-to-market

A. Refining/marketing: volatility and tight product markets improved the underlying margin opportunity, but accounting noise was large

• Management describes the refining-margin mechanism as crude-price escalation forcing even higher product prices to keep refineries running: as crude prices moved up, products had to move up even further to “open up the refinery margin.” ³
• They characterize the market as very tight—“the world is tight,” and jet fuel is “the tightest,” which they argue should keep margins “opening.” ³
• They also explain a regional dynamic in Europe where relative product cracks eventually strengthened (gasoline crack weakness followed by a “large move to the upside, opening up margins”). ³
• However, reported results were materially affected by accounting mark-to-market:
  • Phillips 66 reported mark-to-market losses of $839 million related to short derivative positions used as economic hedges for certain physical positions. ⁴
  • Management emphasizes these were paper impacts on hedges, and notes that they can be outsized specifically because of the “unprecedented volatility across the commodity markets”. ⁵
  • They also quantify that based on the forward curve (as of a specific point), the loss profile is partially expected to reverse: recover about $500 million of that $893 million by year-end, assuming forward curve plays out. ⁵

Net margin interpretation for Q1 2026: The Middle East shock likely supported the economic conditions for refining margins (tight products, widening spreads, margin “opening” pressure), but Q1 earnings included a large derivative mark-to-market hit that can obscure the underlying operating margin trend. ³⁵⁴

B. Evidence of where margins actually moved: market capture and utilization

• Management states that they continued to operate at high utilization, despite the closure of the Strait of Hormuz reducing available downstream capacity. ¹
• They also highlight operational execution and market capture, including commercial trading/dislocation capture (e.g., moving specific crude/product flows and using geographic optionality). ²
• In segment commentary, they indicate that refining/marketing/specialties/renewable fuels results decreased mainly due to mark-to-market impacts (consistent with the $839 million overlay). ⁴
• They note market-capture nuances by region: for example, market capture went down a bit in the central corridor due to maintenance activity and mark-to-market impacts referenced earlier. ⁶

Net margin interpretation: Q1 margin performance appears to be a mix of (1) supportive physical-market tightness and high utilization, and (2) earnings volatility from derivative mark-to-market accounting—leading to reported declines in certain refining/marketing-related results even when forward-looking margin conditions were described as constructive. ¹⁶⁴

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3) Middle East effects on Chemicals margins (CPChem): tightened global petrochemical balances and higher ethylene-cost curve support

While the question is about Phillips 66 “margins” broadly, Phillips 66’s Chemicals segment (CPChem) is explicitly discussed in relation to Middle East disruptions.

• Management says CPChem has been “aggressively pushing” to capture margins, attributing constructive margin conditions to tightened supply/demand from limitations coming out of the Middle East. ⁷
• They also cite upstream-to-petrochem shifts: some Asian producers are selectively moving hydrocarbons away from petrochemical production into energy use to protect that supply, further tightening petrochemical feedstock availability. ⁷
• They describe a cost-curve shift: as oil prices rose versus low-cost ethane in North America, the ethane-based cost floor rose (which they say drives margin increases). ⁷
• They further link the macro disruption to the removal of a prior advantage: discounted crude-to-naphtha conversion that had been feeding low-cost polyethylene into global markets was reduced by events including Iran and earlier Venezuela disruptions; management claims this advantage (about $0.05 to $0.06 per pound) was “eliminated,” which they call constructive for CPChem margins. ⁷

Q1 2026 Chemicals margin direction: Chemicals results increased mainly due to higher polyethylene margins. ⁴ The company attributes the margin environment in part to tighter global balances stemming from Middle East-related limitations and the resulting changes in feedstock economics. ⁷⁴

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4) Phillips 66’s own positioning reduced sensitivity to Middle East crude supply—but didn’t eliminate price-driven volatility

• Management states Phillips 66 is relatively insulated from the physical crude supply disruption because it buys little Middle East crude: only about 1% of crude was purchased from the Middle East. ⁸
• They add that Phillips 66’s crude is generally sourced from Canada, the U.S., and Latin America, and that Canadian/U.S. barrels are pipeline connected—a competitive advantage they emphasize. ⁸⁹

Implication: Phillips 66’s refining throughput access may be less exposed to the Strait of Hormuz closure, but reported margins still reflect the broader commodity volatility regime (including derivatives hedging effects) and tight global product/inventory dynamics. ¹⁵⁴⁸

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Direct answer (combined)

In Q1 2026, Phillips 66 attributes Middle East geopolitical events to unprecedented commodity price volatility (price moves beyond the 95th percentile in March across crude, refined products, and European natural gas benchmarks) and to tighter global balances tied to Strait of Hormuz closure and downstream capacity outages. ¹ These conditions supported constructive underlying refining economics (crude-price pressure forcing product price increases to “open up the refinery margin,” with jets noted as especially tight) and also tightened petrochemical supply-demand conditions that were favorable for CPChem’s polyethylene margin. ³⁷⁴

However, Phillips 66’s reported margins/earnings in Refining/Marketing/renewables were materially distorted downward by large mark-to-market losses on commodity derivative hedges ($839 million in Q1), which management explicitly ties to the outsized volatility created by the commodity shock—even though these are described as hedges intended to protect economic value. ⁵⁴

Overall: Commodity prices became far more volatile and spread-tight, supporting the economic margin opportunity, while Q1 GAAP results were heavily impacted by hedging mark-to-market accounting effects, making segment earnings a noisier signal than the physical-market margin trend. ¹⁵⁴