Why Phillips 66 (PSX) Seems Like a No-Brainer

Following a stratospheric cycle in 2022 that saw downstream energy giant Phillips 66 (PSX) jump higher off the backs of inflation and global supply reductions, PSX stock this year is off to a comparatively much slower start. Indeed, while shares gained 20.54% of equity value in the trailing year through the Feb. 16 session, since the January opener, the oil giant gained just under 4%.

Despite the relatively pensive price action, recent developments in the derivatives market suggest a resurgence may materialize soon. Following the closing bell of Thursday’s session, PSX stock represented one of the highlights of Barchart.com’s screener for unusual stock options volume. Specifically, volume hit 25,678 contracts against an open interest reading of 102,992.

Further, the delta between the latest session volume and the volume over the past month came out to 280.36%. Notably, call volume jumped to 23,083 contracts while put volume only mustered 2,595 contracts.

To be sure, the enthusiasm toward PSX stock runs counter to what its fourth-quarter earnings performance might suggest. Per Zacks Equity Research, Phillips 66 delivered earnings per share of $4, missing the consensus target of $4.34 per share. In Q4 2021, the oil firm posted EPS of $2.94.

However, Phillips 66 did manage to blow past estimates for the top line. It posted revenue of $40.91 billion, exceeding the consensus target by 19.26%. Also, the latest tally compared very favorably to sales of $33.57 billion printed in the year-ago quarter.

Moving forward, the fundamentals should help lift PSX stock, perhaps to new heights. Below are three catalysts to consider.

China Factor Boosts PSX Stocks

In many ways, the COVID-19 crisis has gone full circle with China. Initially, its closure to the world economy and subsequent long and draconian mitigation measures crimped commercial activities as well as the normal flow of supply chains. Just recently, Beijing made the decision to reopen its borders, which should be a net positive overall.

However, no global action occurs within a vacuum. As Barchart contributor Rich Asplund noted recently, crude oil prices moved up slightly on increased Chinese fuel demand. Over time, this narrative presents a math problem. Increased economic activities mean greater consumption of critical resources. Such consumption would then lead to reduced supplies, sparking price increases.

Further, alternative methods of transportation at scale are still many years, if not decades away. In other words, the electrification of mobility has only been adopted by the rich and generally well-to-do households. The rest of society must drive combustion-powered vehicles, which will impose energy supply pressures.

Almost invariably, downstream energy specialists will benefit due to the hostage audience framework. Therefore, PSX seems like an easy buy.

Workplace Normalization to Lift Prices

While no one wants to return to the chaotic days of COVID-related quarantines and mobility restrictions, the pandemic surprisingly produced some positive results. For white-collar employees, the global health crisis proved that remote operation can technically work. However, it’s a major question now whether enterprises want it to work.

After all, if Disney (DIS) felt that work-from-home initiatives generated substantial benefits, it probably wouldn’t recall their workers. But that’s exactly what happened. And while employees of various corporate entities threatened to quit if recalled, the rising number of layoffs may have dampened such hubris. Should worker bees quit now, they might not get another job for a while because of increased competition.

Plus, think of it this way: quitting means resignation. There are no unemployment checks for that. Further, refusing to come into the office when requested could be seen as direct insubordination – perhaps leading to termination with cause (i.e. no unemployment checks).

Given this harsh reality, white-collar workers might have to bite the bullet. And that may help boost PSX stock via increased traffic volume.

Geopolitics to Crimp Supply

Finally, the geopolitical framework may cynically lift PSX stock throughout 2023 and perhaps into next year. Within a few more days, we’ll reach the one-year milestone of Russia’s invasion of neighboring Ukraine, an incident that shocked sensibilities and disrupted the modern international order. Fundamentally, the issue is that neither side provided any indication that it’s willing to negotiate.

Indeed, Ukraine can’t back down. It’s a sovereign nation with a unique culture and language. For it to “negotiate” would be akin to a thief burgling your home offering you to keep some of your possessions in exchange for not taking all of your possessions. It’s a disingenuous and impossible circumstance to accept.

On the Russian side, President Vladimir Putin already laid down his cards, committing to a kinetic approach to geopolitics. Put another way, by going kinetic, there is no other threat to fall back on. Thus, a retreat from Ukraine would mean abject failure for the Kremlin, possibly leading to Putin’s violent ouster.

Unfortunately, this war may last longer than anybody earlier anticipated. While harsh and disturbing, the narrative will almost certainly boost energy prices, cynically benefitting PSX stock.

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