Crude Oil Prices Fall 2% as Hormuz Shipments Resume: Impact on PSX Energy and Chemical Stocks

What the 2% drop in crude oil prices means

International crude oil prices, including Brent and US West Texas Intermediate (WTI), saw a notable decline of approximately 2% on Friday. Brent crude futures fell to $73.79 a barrel, while WTI dropped to $70.48 a barrel. This dip was primarily driven by the resumption of oil tanker shipments through the Strait of Hormuz, which eased earlier supply concerns. The market reacted more to the increased supply flow than to a separate incident where a cargo vessel was reportedly hit near Oman.

This movement in global crude prices is a key indicator for Pakistan's energy sector, as the country is a net importer of crude oil and petroleum products. Fluctuations directly influence the cost of imports, inventory valuations for local companies, and the revenue streams for domestic oil and gas producers whose prices are often linked to international benchmarks.

Why it matters for energy and chemical stocks

The price of crude oil is a fundamental driver for several sectors on the Pakistan Stock Exchange. For Oil & Gas Exploration companies, their revenue is directly tied to the international price of oil and gas, as their wellhead prices are often dollar-denominated. A fall in crude prices generally means lower earnings. Similarly, Oil & Gas Marketing companies and refineries hold significant inventory, and a sudden drop in crude prices can lead to inventory losses, impacting their short-term profitability. Conversely, sectors that use crude oil or its derivatives as a major feedstock, such as chemical manufacturers, typically benefit from lower input costs, which can improve their profit margins. Power generation companies that rely on furnace oil or LNG for fuel may also see a positive impact from potentially lower fuel costs.

Which stocks, and why

• Oil & Gas Exploration Companies (E&Ps): Companies like Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum are negatively impacted. Their earnings are closely linked to international crude oil prices, as their wellhead prices for oil and gas are typically indexed to global benchmarks. A 2% fall in crude prices suggests a direct reduction in their revenue per barrel/MMBTU.

• Oil Marketing Companies (OMCs): Pakistan State Oil, Attock Petroleum, and Shell Pakistan face a negative impact. OMCs maintain significant inventory of petroleum products. When crude prices fall, the value of their existing inventory declines, leading to inventory losses. This can squeeze their already thin regulated margins.

• Refineries: National Refinery, Attock Refinery, Pakistan Refinery, and Cnergyico PK Limited are also negatively affected. Like OMCs, refineries hold crude oil inventory for processing. A drop in crude prices results in inventory losses, impacting their profitability, especially in the short term.

• Chemical Companies: Lotte Chemical Pakistan and Engro Polymer & Chemicals are likely to see a positive impact. Lotte Chemical produces PTA, whose margins are influenced by the price of its feedstock, paraxylene (PX), which is crude-linked. Engro Polymer, the sole local PVC producer, benefits from lower ethylene prices, also linked to crude. Lower crude prices generally translate to reduced input costs, potentially expanding their profit margins.

• Power Generation Companies (IPPs): Companies such as Hub Power, K-Electric, Nishat Power, and Kot Addu Power could experience a positive, albeit indirect, effect. Many IPPs use furnace oil or re-gasified LNG (RLNG) as fuel, whose prices are influenced by international crude oil benchmarks. A sustained drop in crude prices could lead to lower fuel costs for these power producers, potentially improving their operational efficiency, though the impact on their regulated tariffs and circular debt situation would need to be considered.

What to watch

Investors should monitor the trajectory of international crude oil prices, as continued volatility or a sustained trend could further impact these sectors. Key data points to watch include global oil supply and demand reports, geopolitical developments in the Middle East that could affect shipping lanes or production, and the local pricing mechanisms for petroleum products and furnace oil, which determine how global price changes are passed through to Pakistani companies and consumers. Any further significant movements in crude prices, or changes in local refining margins and OMC pricing formulas, will be crucial for assessing the ongoing impact on these listed companies.