Oil prices have been on a wild ride this year, and most investors assume the story is simple: Less crude moving through the Strait of Hormuz means higher prices at the pump.
Exxon Mobil’s leadership says that take misses the real problem.
Speaking at the Barclays 40th Annual Energy Power Conference on Sept. 9, Chief Financial Officer Neil Hansen told analysts the bigger threat to the energy system isn’t crude supply, but refining.
The distinction matters for anyone holding Exxon Mobil (XOM) stock or watching gas prices climb, as it changes how long the pain might last and which part of the business could benefit.
Exxon Mobil stock investors should watch refining
Hansen explained that when a shock like the Middle East conflict unfolds, markets usually respond in a similar pattern.
Countries release oil from strategic and commercial reserves, and producers such as the U.S. and Brazil ramp up output. Then, higher prices force some demand destruction in chemicals and refining.
Put together, these forces have kept crude prices in a relatively contained range.
Refining is a different proposition. Hansen pointed to a stack of problems impacting the industry at once:
- Roughly 3 million barrels a day of refining capacity is offline because the Strait of Hormuz is closed.
- China has stopped exporting refined products, pulling another 2 million barrels a day off the market.
- Ukraine’s strikes on Russian refineries have knocked out about 1 million barrels a day of capacity.
- Asian refiners are short the specific crude grades they need to run at full rates.
CEO Darren Woods, speaking on Exxon’s second quarter earnings call in July, put it bluntly: Available refining capacity relative to demand is lower than he’s seen at any point outside the Covid shutdown, when demand itself had collapsed.
What it means for Exxon Mobil shareholders
For a normal refiner, the squeeze would be a headache. For Exxon Mobil, which Woods called the second largest refiner in the world and the largest outside China, it’s turned into a profit engine.
The numbers back that up.
Chemical product margins jumped roughly 180% quarter over quarter in the second quarter as North American plants filled the gap left by Middle East disruptions.
Specialty products posted record quarterly and first-half earnings.
Energy products, the refining and fuels business, now makes up about 23% of Exxon’s business line earnings, up from just 9% five years ago.
Related: Pain at the gas pump rises as Middle East violence worsens
Hansen framed it as proof of the company’s integrated model: the idea that owning everything from crude production to the gas station lets Exxon capture value wherever it shows up in the chain.
“When we look at the entire energy system today, we would tell you that the supply shock and the pinch point really is around refining,” he stated.
Crude markets are adjusting as they should. Notably, refining is the part of the system that can’t be fixed quickly, as building new capacity takes years.
The risk XOM shareholders can’t ignore
Higher refining margins mean higher prices at the pump, and that’s starting to draw political attention.
Woods was asked directly about a European country moving toward windfall taxes on downstream profits, and he didn’t hold back, calling it shortsighted policy that would ultimately discourage the very investment needed to fix the shortage.
Exxon is already suing the European Union over a prior windfall tax, arguing it amounted to an improper taking.
So the same disruption fueling Exxon’s best quarters in years also raises the odds of new regulatory pushback in Europe and elsewhere.
More Oil & Gas:
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- A big shift in the U.S. energy market is about to happen
That’s a real variable for anyone modeling out Exxon Mobil stock over the next few quarters.
Hansen’s larger point is that this story won’t resolve itself quickly. Even once shipping through the Strait stabilizes, he said, it will take time for confidence to return and for tanker traffic to ramp back to prior levels.
Refining capacity lost to the conflict, to China’s export halt, and to strikes on Russian facilities won’t come back online overnight, either.
For now, this gap is precisely what’s driving Exxon’s outsized margins in fuels, chemicals, and specialty products.
Whether that continues depends on how quickly the world’s refining system heals, and whether governments respond to high prices with policy that makes the shortage worse.
Related: Exxon Mobil signals massive profit spike but Wall Street is divided