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Strong Refining Margins, Falling Crude Stocks Boost Energy Outlook, UBS Says

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US crude inventories dropped by 8.2 million barrels as refinery utilization climbed to 96.7%, reinforcing concerns over tightening fuel supplies, UBS said in a Wednesday note.

The Department of Energy reported an 8.2 million-barrel crude draw, exceeding consensus expectations for a 4.6 million-barrel decline and aligning with the American Petroleum Institute estimate of an 8.33 million-barrel draw, UBS said.

Gasoline inventories fell by 0.90 million barrels, compared with forecasts for a 1 million-barrel decline. Diesel inventories increased by 0.95 million barrels, versus expectations for a 500,000-barrel draw, according to UBS.

Refiners increased utilization rates by 1.4 percentage points over the week to 96.7%. UBS said operators rarely sustain such levels for long, yet fuel inventories continue to tighten despite elevated processing rates.

US fuel inventories continue to trail historical levels, with diesel stocks running 12.8% below the five-year average and 5.8% below year-ago levels. Gasoline inventories also remain tight, standing 6.3% below the five-year average and 6.9% lower than a year earlier, according to UBS.

Inventory shortages persist across key regions. Diesel stocks in PADD 1 sit 21.6% below the five-year average, while PADD 5 inventories remain 16.7% below historical levels. Gasoline inventories also trail their five-year averages, with deficits ranging from 3.0% in PADD 1 to 10.3% in PADD 3, UBS said.

Margins remain well above mid-cycle levels, supporting refinery profitability. In Q2 2026, Mid-Continent cracks averaged $28.58 per barrel versus $13.40/bbl in Q1 2026 and $14.63/bbl a year earlier, while West Coast cracks increased to $41.80/bbl from $24.65/bbl and $25.28/bbl, respectively, UBS added.

Strong margin conditions also extended to other regions. North Atlantic cracks averaged $27.64/bbl in Q2 2026, up from $17.41/bbl in the previous quarter and $13.76/bbl a year earlier, while Gulf Coast cracks rose to $30.64/bbl from $18.36/bbl and $12.76/bbl, respectively.

Driven by a growing project pipeline, Plains All American Pipeline (PAA) increased its 2026 growth capital spending forecast to $400 million to $450 million net to the partnership from roughly $350 million previously. The company still expects maintenance spending to remain around $185 million.

Plains has moved forward with several high-return projects across its Permian long-haul, Permian gathering and Canadian gathering systems as stronger customer interest and improving oil market fundamentals support additional investment, UBS said.

After touring Archer-Daniels-Midland's (ADM) Decatur facility, UBS highlighted strong agricultural services results and continued demand for soybean meal in domestic and export markets. Management also views organic expansion opportunities as more attractive than bolt-on acquisitions at present.

Improving margins across refining, chemicals and renewable diesel operations could drive stronger earnings and cash flow for Phillips 66 (PSX) through 2026. The company could also accelerate debt reduction as profitability improves, UBS said.

Price: $21.34, Change: $-0.24, Percent Change: -1.11%

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