Crude Oil Firms on US-Iran Talks: E&P Stocks Gain, Chemical Margins Squeezed

What the firmer crude oil prices mean

International crude oil prices saw a modest increase on Tuesday, rebounding after two sessions of losses. This uptick was attributed to a slight cooling of optimism regarding US-Iran peace talks. When geopolitical tensions or uncertainties persist, or the prospect of their resolution diminishes, it often leads to firmer oil prices as markets price in potential supply risks. The news also noted that stronger crude oil prices provided support for agricultural commodities like soybeans and corn, given their role in biofuel production.

For Pakistan's stock market, the primary channel of impact from this news is the movement in crude oil prices, which directly affects several sectors, particularly those involved in oil and gas exploration, marketing, refining, and chemicals.

Why it matters for energy and chemical stocks

Firmer crude oil prices have a differential impact across the energy value chain. For companies that extract oil and gas, higher international prices generally translate to better revenue. This is because the wellhead prices for crude oil and often natural gas in Pakistan are linked to global benchmarks and the US dollar. Therefore, a rise in international crude prices, especially when coupled with a stable or weakening rupee, can boost their top line.

On the other hand, companies that rely on crude oil or its derivatives as a primary raw material face increased input costs. This can squeeze their profit margins if they are unable to fully pass on these higher costs to their customers. For fuel marketers and refineries, rising crude prices can also lead to short-term inventory gains, as the value of their existing stock increases.

Which stocks, and why

Several listed companies on the Pakistan Stock Exchange are exposed to movements in international crude oil prices:

• Oil and Gas Exploration (E&P) Companies: Firms like Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum are direct beneficiaries of higher crude oil prices. Their earnings are closely tied to international crude benchmarks because their wellhead prices for oil and gas are often indexed to the US dollar and global rates. Firmer crude prices mean higher revenue per barrel of oil and per unit of gas produced, which is positive for their profitability.

• Oil Marketing Companies (OMCs): Companies such as Pakistan State Oil, Attock Petroleum, and Shell Pakistan can experience short-term inventory gains when crude oil prices rise. As they hold significant fuel inventory, the value of this stock appreciates, providing a temporary boost to their earnings. However, this benefit is typically short-lived and can be offset by higher working capital requirements for future imports.

• Refineries: Similarly, refineries like National Refinery, Attock Refinery, and Pakistan Refinery also benefit from inventory gains on their crude oil feedstock when prices firm. Their refining margins, which represent the difference between the prices of refined products and crude oil, can also be supported if product prices move in tandem with crude.

• Chemical Manufacturers: For companies that use crude oil derivatives as key raw materials, firmer crude prices generally translate to higher input costs. Lotte Chemical Pakistan, which produces PTA from paraxylene (a crude derivative), and Engro Polymer & Chemicals, the sole local producer of PVC from ethylene, could see their profit margins pressured. If they cannot fully pass on these increased feedstock costs to their customers, their profitability may be negatively affected.

What to watch

Investors should closely monitor the trajectory of international crude oil prices and any further developments in Middle Eastern geopolitics, particularly regarding US-Iran relations. The sustainability of these firmer crude prices will be key. Locally, it will be important to observe how these international price movements translate into domestic product prices and refining margins, as well as the ability of chemical companies to manage their input costs and maintain their margins.