Volatility in U.S. Refining Operations and Its Impact on Energy Investment Strategy

The U.S. refining sector is experiencing a surge in operational volatility, driven by unplanned shutdowns, regulatory pressures, and aging infrastructure. Recent disruptions at Citgo, Phillips 66, and Valero refineries in Texas and California highlight the fragility of refining hubs and underscore the need for investors to prioritize assets with robust environmental and operational safeguards. These incidents not only strain supply chains but also amplify refining margins, creating both risks and opportunities for energy investors.

Operational Risks in Texas Refineries

Texas, a cornerstone of U.S. refining capacity, has seen a string of operational hiccups. Citgo’s Corpus Christi East refinery faced an unplanned shutdown of its FCCU2 unit due to a control valve failure, while its crude and vacuum units were idled for a planned turnaround [1]. These outages tightened regional product markets, pushing refining margins higher as supply gaps emerged [3]. Phillips 66’s Borger refinery in Texas also reported a sulfur recovery unit upset, resulting in a five-hour emission event [1]. Meanwhile, Valero’s Three Rivers refinery in Texas experienced a fire in early 2025, though it was contained without injuries [4].

These incidents reflect the sector’s vulnerability to technical failures and regulatory scrutiny. For instance, Phillips 66’s Borger refinery faced a $800 million court judgment in a biofuels trade secrets case, compounding operational risks [2]. Such events signal that even minor disruptions can escalate into financial liabilities, particularly for firms with aging infrastructure or weak compliance frameworks.

Market Resilience and Strategic Implications

Despite these challenges, the refining sector has shown resilience. Valero’s Q3 2025 financial report revealed a $1.3 billion operating income from its refining segment, matching 2024 levels despite the Three Rivers fire [1]. This resilience stems from strong refining throughput and high-margin environments driven by supply constraints. However, the sector’s long-term viability depends on its ability to adapt to regulatory and environmental shifts.

California’s refining capacity decline, with Phillips 66’s Los Angeles refinery and Valero’s Benicia refinery set to close by late 2025 and 2026, respectively, exemplifies this tension [2]. These closures, driven by high operating costs and regulatory pressures, will reduce California’s gasoline supply by 20% [2]. While this creates short-term margin opportunities, it also increases reliance on imported fuels, which are more volatile and costly.

Strategic Positioning for Investors

For investors, the key lies in identifying refining assets with proactive environmental strategies and operational redundancy. Citgo’s Corpus Christi outages, for example, highlight the importance of maintenance planning and emissions control [1]. Similarly, Phillips 66’s strategic shift toward renewables—announced alongside its LA refinery closure—demonstrates a forward-looking approach to align with decarbonization trends [2].

Investors should also scrutinize regulatory exposure. Valero’s Benicia closure, attributed to California’s stringent regulations, underscores the risks of operating in high-cost, high-regulation environments [4]. Conversely, Texas’s relatively favorable regulatory climate offers a buffer, though even there, emission events and power outages (as seen at Phillips 66’s Sweeny refinery) remain concerns [5].

Conclusion

The refining sector’s volatility is a double-edged sword: it creates margin opportunities but also exposes investors to operational and regulatory risks. As Texas and California grapple with aging infrastructure and shifting regulations, strategic positioning in assets with strong environmental safeguards and operational agility will be critical. Investors must weigh short-term gains against long-term resilience, prioritizing firms that balance profitability with sustainability.

Source:
[1] Citgo Corpus Christi, P66 Borger Refineries Report Issues [https://www.marketwatch.com-story/citgo-corpus-christi-p66-borger-refineries-report-issues-late-last-week-opis-143e944a]
[2] California Faces High Pump Prices as Phillips 66 Shuts LA Refinery [https://oilprice.com/Latest-Energy-News/World-News/California-Faces-High-Pump-Prices-as-Phillips-66-Shuts-LA-Refinery.html]
[3] Citgo outage tightening products markets, boosting refiners' margins [https://www.ogj.com/refining-processing/article/17261512/citgo-outage-tightening-products-markets-boosting-refiners-margins]
[4] Fire hits at Valero's Three Rivers refinery [https://www.ogj.com/refining-processing/refining/article/55252580/fire-hits-at-valeros-three-rivers-refinery]