Fuel Prices Unchanged Despite Falling Crude: OMCs Gain, E&Ps Face Headwind

What the government's decision changed

The federal government announced on Friday that it would keep the prices of petrol and high-speed diesel (HSD) unchanged for the next week. Petrol will remain at Rs299.5 per litre, and HSD at Rs311.47 per litre. This decision comes even as international crude oil prices continue to fall, with reports indicating a 2% drop on Friday alone and steep weekly losses. Last week, the government had significantly reduced petroleum prices, passing on the benefit of lower global oil prices to the public. However, this week's decision means the benefit of further international price declines is not being passed on to consumers.

Here are the current fuel prices:

Why it matters for energy and consumer stocks

The government's choice to maintain local fuel prices despite falling international crude creates a differential that impacts various sectors. For Oil & Gas Exploration companies, their revenue is directly tied to international crude prices, so a continued fall is generally negative. Conversely, Oil & Gas Marketing companies, which import fuel, could see improved gross margins if their input costs decline while their regulated selling prices remain stable. For consumers, the lack of a further price cut means their purchasing power is not boosted as much as it could have been, which can indirectly affect demand for consumer goods.

Which stocks, and why

Oil & Gas Exploration (E&Ps) Companies like Oil & Gas Development Company (OGDC), Pakistan Petroleum (PPL), Pakistan Oilfields (POL), and Mari Petroleum (MARI) are directly impacted by international crude oil prices. Their wellhead prices, which determine their revenue, are typically linked to global benchmarks. Therefore, continuously falling international crude prices are generally negative for their earnings outlook, as it reduces the value of their production.

Refineries For refineries such as National Refinery (NRL), Attock Refinery (ATRL), and Pakistan Refinery (PRL), falling crude oil prices mean lower input costs for their operations. If local product prices remain stable, as the government has decided, this scenario can lead to improved refining margins, which is positive for their profitability. While there's always a risk of inventory losses if crude prices fall sharply on existing stock, the sustained fall combined with stable local product prices generally benefits their crack spreads.

Oil & Gas Marketing Companies (OMCs) Pakistan State Oil (PSO), Attock Petroleum (APL), and Shell Pakistan (SHEL) are the primary beneficiaries of this decision. As international crude prices fall, OMCs can procure petroleum products at lower costs. By keeping local retail prices stable, the government effectively allows OMCs to widen their gross margins on newly acquired, cheaper inventory. This situation is positive for their profitability, assuming the Petroleum Levy or other taxes do not absorb the entire differential.

Food & Personal Care Companies in the Food & Personal Care sector, such as Nestle Pakistan (NESTLE), Engro Foods (EFOODS), National Foods (NATF), Colgate-Palmolive Pakistan (COLG), and Unilever Pakistan Foods (UPFL), rely on consumer purchasing power. When fuel prices are maintained despite falling international crude, consumers do not receive the benefit of lower transport costs, which could have freed up more disposable income. This means the potential boost to consumer spending on non-essential items is curtailed, which is a slight negative for these companies' sales volumes.

What to watch

Investors should monitor future announcements regarding petroleum prices and the Petroleum Levy. Any changes in the government's pricing policy or the levy's structure could alter the margin dynamics for OMCs. Additionally, tracking international crude oil price movements will remain crucial for E&P companies. For consumer goods, observing broader economic indicators like inflation and consumer spending trends will provide further insight into the impact on demand.