Crude Oil Prices Fall 2% on Easing Supply Concerns: Impact on PSX Energy and Chemical Stocks

What the 2% drop in crude oil prices means

International crude oil prices saw a notable decline of approximately two percent on Friday, contributing to significant weekly losses. Brent crude futures fell to $73.76 a barrel, while US West Texas Intermediate (WTI) dropped to $70.43 a barrel. This downturn was primarily driven by easing concerns over global oil supply, as more stranded oil tankers successfully navigated out of the Strait of Hormuz. This positive development overshadowed a separate incident involving a cargo vessel near Oman, which did not significantly impact market sentiment regarding supply.

Why lower crude prices matter for PSX energy and chemical stocks

Falling crude oil prices have a multifaceted impact across Pakistan's stock market, particularly for companies in the energy and chemicals sectors. For oil and gas exploration companies, crude prices directly influence their revenue, as the wellhead prices for the oil and gas they produce are often linked to international benchmarks. Refineries and oil marketing companies (OMCs) are affected by inventory valuations, while chemical manufacturers benefit from lower feedstock costs. Power generation companies that rely on furnace oil also see a change in their fuel expenses.

Which stocks, and why

For Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum, which are major oil and gas exploration and production (E&P) firms, a drop in crude prices is generally negative. Their earnings are closely tied to international oil prices, as their USD-linked wellhead prices for crude oil and natural gas will decrease, directly impacting their top line revenue. This 2% fall, while not massive, contributes to a negative trend for their profitability.

Refineries like National Refinery, Attock Refinery, and Pakistan Refinery typically face inventory losses when crude prices fall. They purchase crude oil at prevailing prices and process it over time. If crude prices decline during this period, the value of their existing inventory decreases, and their refined products may sell at lower prices, potentially compressing refining margins. This can negatively affect their short-term earnings.

Similarly, Pakistan State Oil, Attock Petroleum, and Shell Pakistan, as oil marketing companies (OMCs), also experience inventory losses. They hold significant fuel stocks, and a drop in crude prices means the value of these stocks diminishes, leading to negative inventory adjustments that can impact their profitability.

Conversely, chemical manufacturers such as Lotte Chemical Pakistan and Engro Polymer & Chemicals stand to benefit from lower crude prices. Lotte Chemical's primary product, PTA, uses paraxylene (PX) as a key feedstock, which is derived from crude oil. Engro Polymer, the sole local PVC producer, uses ethylene, also an oil-linked derivative. Lower crude prices translate to reduced feedstock costs, which can improve their profit margins.

Power generation companies, specifically thermal independent power producers (IPPs) like Hub Power, Kot Addu Power, and Nishat Power, as well as K-Electric which operates some thermal plants, could see a positive impact. Lower crude prices lead to cheaper furnace oil, which is a fuel source for some of their power plants. While fuel costs are generally passed through to consumers via tariffs, lower costs can ease working capital requirements and potentially reduce the accumulation of circular debt in the power sector.

What to watch

Investors should closely monitor the trajectory of international crude oil prices, particularly Brent and WTI benchmarks, for sustained trends. Any further significant movements, whether up or down, will continue to influence the earnings outlook for PSX companies in the E&P, refinery, OMC, chemical, and power sectors. The market will also be watching for any shifts in global supply-demand dynamics and geopolitical developments that could impact oil flows, especially from key regions like the Middle East.