Refining Margins in 2026: Assessing the Commodity Balance for MPC and PSX

The refining industry is entering 2026 on a tight commodity balance. The core dynamic is a divergence between demand and supply growth, with demand for refined products expanding faster than the system can produce them, setting the stage for potential margin support. The International Energy Agency (IEA) forecasts global oil demand to rise by 850 kb/d in 2026. Crucially, this growth is being reshaped: petrochemical feedstock products will represent more than half of this year's gains, a significant shift from 2025 when transport fuels dominated. This structural change means the demand engine is pulling more strongly on lighter, higher-value products, which could benefit refiners with the right configurations.

On the supply side, the picture is less straightforward. While total world oil supply is expected to grow by 2.4 mb/d in 2026, the key indicator of potential tightness lies in the refinery sector itself. Global refinery crude throughputs dropped from an all-time high of 86.3 mb/d in December to 85.7 mb/d in January, and are forecast to increase by only 790 kb/d to 84.6 mb/d in 2026. This represents a slowdown from the nearly 1 mb/d gain seen in 2025, signaling a plateau or even a decline in the system's productive capacity. The IEA notes that a year of new refining capacity, shifting trade flows and uneven product demand is set to reshape global markets in 2026, but the net effect on throughputs is a critical unknown.

This creates a potential squeeze. Demand growth is outpacing the projected increase in refinery runs. At the same time, geopolitical and trade factors are adding volatility. For example, gasoline self-sufficiency in key regions could reduce export flows and alter trade patterns, while diesel trade risks remain a persistent source of disruption. The bottom line is that the commodity balance for refined products is tightening. With demand for high-value petrochemicals surging and refinery output growth stalling, the physical market for these products is likely to remain supported, providing a fundamental underpinning for refining margins next year.

Company Positions in the 2026 Balance

The projected commodity imbalance favors refiners with the most efficient operations and the clearest strategic focus. Both Marathon Petroleum and Phillips 66 are well-positioned, but they are executing different plays to capture value from the tightening market.

Marathon's strength lies in its operational discipline and capital allocation. The company achieved a full-year refining utilization of 94 percent in 2025, demonstrating its ability to run its massive U.S. system close to capacity. This efficiency translated directly into commercial performance, with a margin capture of 105 percent for the year. That means Marathon's realized margins were 5% above the industry benchmark, a clear competitive edge. The financial results backed this up: Marathon generated $6.8 billion in full-year free cash flow and returned $4.5 billion to shareholders through buybacks. This robust cash generation, driven by strong operating performance, provides the firepower for peer-leading capital returns and strategic investments.

Phillips 66 is taking a more targeted approach, using portfolio actions to sharpen its focus. A key move was idling its Los Angeles refinery, a strategic decision aimed at optimizing the company's asset mix. Management expects this action to deliver an annualized benefit to margins of $0.30 per barrel in 2026. This is a quantified cost-saving measure that directly improves profitability per barrel of refined product. The company is also targeting a reduction in controllable costs to about $5.50 per barrel by the end of 2027, further bolstering its operating leverage. While Marathon is a pure-play refiner, Phillips 66's diversified portfolio across refining, midstream, and chemicals provides a different kind of resilience, though it spreads the pure refining exposure.

The bottom line is that both companies are structuring themselves to benefit from the 2026 supply-demand dynamic. Marathon leverages its scale and efficiency to capture every available margin point, while Phillips 66 uses selective idling and cost targets to improve its profitability per barrel. Their substantial free cash flow in 2025-Marathon's $6.8 billion and Phillips 66's $2.7 billion-gives them the financial flexibility to navigate the year's volatility and continue returning capital to shareholders.

2026 Outlook: Margin Drivers and Capital Allocation

The tightening commodity balance sets a supportive stage for refining margins, but the path to 2026 profits will be shaped by specific catalysts and company strategies. The start of new capacity is one such near-term event. PBF Energy is expected to start its catalytic cracking unit at the Martinez refinery in the first week of March. This addition will increase regional refining capacity, which could moderate crack spreads in California and potentially add volatility to regional pricing as the market adjusts to the new supply.

More broadly, the persistent source of volatility remains geopolitical disruptions to crude flows. In January, supply outages tightened physical crude markets, contributing to a $10/bbl surge in benchmark prices. This pattern of outages from regions like Kazakhstan and Venezuela, coupled with escalating tensions, creates a backdrop of instability that can quickly amplify margin swings. For refiners, this means periods of strong profitability can be followed by sharp corrections if supply disruptions ease or new ones emerge.

Capital allocation is where the companies' different philosophies will be tested. Marathon Petroleum has demonstrated an aggressive return of capital, returning $4.5 billion to shareholders through buybacks in 2025. This strategy, backed by its massive free cash flow, aims to boost per-share value for investors who prefer growth through share reduction. In contrast, Phillips 66 offers a higher current yield, with a 3.04% dividend yield. This approach provides a more predictable income stream and may appeal to investors seeking steady cash returns.

The bottom line is that both companies are well-positioned to benefit from the 2026 supply-demand dynamic, but they are converting that potential into shareholder returns in distinct ways. Marathon is using its cash flow to aggressively buy back stock, while Phillips 66 is prioritizing a higher dividend. The choice between these strategies will depend on investor preferences for growth versus income, as both firms navigate the same volatile market.

Risks to the Commodity Balance Thesis

The supportive supply-demand dynamic for refined products is not guaranteed. Several key uncertainties could disrupt the balance and undermine margin expectations for 2026.

First, there is a risk of a sharper-than-expected decline in refinery throughputs, which would signal weakening demand rather than a supply shortage. The IEA notes that global refinery crude throughputs dropped from an all-time high of 86.3 mb/d in December to 85.7 mb/d in January, a decline that was driven by maintenance and lower margins. If this trend persists or accelerates, it would indicate that refiners are scaling back runs due to poor economics, not because of a physical shortage of crude. This would directly compress margins and negate the tightness thesis, as it would point to a demand slowdown or a structural overcapacity issue.

Second, diesel trade disruptions due to geopolitical pressures remain a persistent risk to regional imbalances. The IEA's insight paper specifically highlights the geopolitical risks that still have the power to disrupt trade flows. This is not a theoretical concern. In January, supply outages and export constraints curtailed Kazakh, Russian and Venezuelan flows, contributing to a $10/bbl surge in benchmark prices. While such outages can tighten markets in the short term, they also create volatility and the potential for sudden reversals. If tensions ease or new trade routes open, the resulting flood of diesel into key markets could quickly relieve regional tightness and cap margin gains.

Finally, the risk of a faster-than-forecasted increase in new refining capacity could alleviate tightness and cap margin gains. The IEA forecasts refinery crude runs to increase by an average 790 kb/d to 84.6 mb/d in 2026, a slowdown from the nearly 1 mb/d gain in 2025. However, the IEA's insight paper notes that a year of new refining capacity... is set to reshape global markets in 2026. If capacity additions come online ahead of schedule or exceed expectations, they could provide a larger supply buffer than currently modeled. This would ease the pressure on crack spreads and limit the upside for refiners, even if overall demand remains strong.

The bottom line is that the 2026 margin story is a race between demand growth and supply response. While the current balance points to support, these risks-weak throughput signaling demand weakness, volatile trade flows, and faster capacity growth-could quickly shift the equation. Refiners must navigate this landscape with operational discipline, as the path to profits will be defined by how well they manage these uncertainties.