Crude Oil Price Slide: Negative for E&Ps, Refiners, OMCs; Positive for Chemicals

What the fall in crude oil prices means

International crude oil prices have seen a notable decline, with Brent crude futures settling at $77.8 per barrel after easing more than 3% in the previous session. This downward movement is primarily attributed to a reduction in market anxiety related to geopolitical tensions involving the U.S. and Iran, as peace talks are reportedly progressing. A calmer global energy outlook typically translates to lower commodity prices.

Why it matters for energy and chemical stocks

For Pakistan's stock market, a significant shift in global crude oil prices has direct and indirect implications across several sectors. Companies involved in oil and gas exploration and production (E&P) see their revenue directly linked to international crude prices. Similarly, oil marketing companies (OMCs) and refineries are affected by inventory valuations and input costs. Conversely, industries that use crude oil derivatives as feedstock, such as certain chemical manufacturers, can benefit from lower raw material expenses.

Which stocks, and why

The decline in crude oil prices will have a varied impact on listed companies:

For Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum, all major E&P firms, the news is generally negative. Their wellhead gas and oil prices are often linked to international crude benchmarks and the US dollar exchange rate. A fall in global crude prices means lower realised prices for their production, which can reduce their revenue and profitability. This is a direct hit to their core business model, making the impact high and long-lasting as long as prices remain subdued.

Pakistan State Oil, Attock Petroleum, and Shell Pakistan, which are oil marketing companies, face a negative impact. OMCs typically hold significant inventory of petroleum products. When crude prices fall rapidly, the value of their existing, higher-cost inventory declines, leading to potential inventory losses or reduced inventory gains. While their regulated margins are a key driver, these inventory effects can noticeably affect their short-term earnings.

Similarly, for refiners like National Refinery, Attock Refinery, and Pakistan Refinery, a drop in crude prices is negative. Refineries also maintain crude oil inventory for processing. A falling crude price environment can result in inventory losses, impacting their profitability, particularly in the short term.

On the positive side, chemical manufacturers like Lotte Chemical Pakistan and Engro Polymer & Chemicals could see benefits. Lotte Chemical produces PTA, whose primary feedstock, paraxylene (PX), is derived from crude oil. Lower crude prices generally translate to lower PX costs, which can expand PTA-PX margins if PTA prices do not fall proportionally. Engro Polymer, the sole local PVC producer, uses ethylene as a key input, which is also derived from crude. Reduced crude prices can lead to lower ethylene costs, potentially improving their PVC-ethylene margins. For these companies, the impact is medium and long-lasting, as feedstock costs are a significant component of their operating expenses.

Power generation companies such as Hub Power, K-Electric, Nishat Power, and Kot Addu Power may also see a low positive impact. Some of these thermal power producers use furnace oil, which is a derivative of crude oil. Lower crude prices can lead to a reduction in furnace oil costs. While most IPPs operate on a pass-through tariff mechanism, meaning fuel cost changes are passed on to consumers, lower fuel costs can still improve working capital management and potentially ease the accumulation of circular debt in the power sector, offering a marginal benefit.

What to watch

Investors should closely monitor the trajectory of international crude oil prices, particularly Brent, and any further developments in Middle Eastern geopolitics. The sustainability of the current lower price levels will be crucial. For E&P companies, their quarterly results will show the impact on realised wellhead prices. For OMCs and refiners, inventory gains or losses will be a key line item in their upcoming financial reports. Chemical companies' margins will reflect changes in feedstock costs. Any significant shift in the PKR/USD exchange rate could also modify the impact for all these companies, as many of their revenues or costs are dollar-linked or involve imported components.