Gaza Conflict Escalation: PSX Oil & Gas, Refinery, and Chemical Stocks React to Crude Oil Risk

What the Gaza conflict means for global oil

The latest reports from Gaza indicate continued Israeli military action and casualties, even as mediators attempt to broker a ceasefire. This ongoing violence underscores persistent geopolitical instability in the Middle East. Such tensions often translate into higher international crude oil prices, as markets price in potential supply disruptions, particularly from the Strait of Hormuz, a critical shipping lane for global oil.

Why crude oil prices matter for PSX energy and chemical stocks

For Pakistani companies, a sustained increase in global crude oil prices has varied impacts depending on their position in the energy value chain. Oil and gas exploration and production (E&P) companies generally benefit, as their wellhead prices for crude and gas are often linked to international benchmarks. Refineries also tend to see a positive effect through inventory gains and potentially improved refining margins, which is the difference between the price of crude oil and the refined products it yields.

Conversely, oil marketing companies (OMCs) and chemical manufacturers typically face headwinds. OMCs, which import a significant portion of their fuel, incur higher costs for their products. While they might see some short-term inventory gains if prices rise rapidly, a prolonged period of high crude prices strains their working capital and can exacerbate issues like circular debt, which is the accumulation of unpaid dues across the energy supply chain. Chemical companies, particularly those using crude oil derivatives as feedstock, which are the raw materials for their products, also face increased input costs, potentially squeezing their profit margins.

Which stocks, and why

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

• Oil & Gas Exploration Companies: Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum are all E&P firms. Their earnings are positively correlated with crude oil prices, as their revenue from oil and gas sales increases when international benchmarks rise. This news is generally positive for their business outlook.

• Refineries: National Refinery, Attock Refinery, and Pakistan Refinery typically benefit from rising crude prices. They often hold crude oil inventory, which appreciates in value, leading to inventory gains. Furthermore, refining margins can sometimes improve in a rising crude price environment, though this is a complex dynamic.

• Oil Marketing Companies: Pakistan State Oil, Attock Petroleum, and Shell Pakistan are OMCs. While they might experience short-term inventory gains, a sustained increase in crude oil prices generally presents a challenge. Higher import costs can put pressure on their working capital and profitability, especially if regulated retail fuel prices do not adjust quickly enough to cover these increased costs. This can also worsen the existing problem of energy circular debt.

• Chemical Manufacturers: Lotte Chemical Pakistan produces PTA, a polyester feedstock derived from paraxylene (PX), which is an oil derivative. Engro Polymer & Chemicals produces PVC, with ethylene as a key feedstock, also derived from crude. For both, higher crude oil prices mean increased raw material costs, which can negatively impact their margins if they cannot fully pass on these costs to customers.

What to watch

Investors should monitor global crude oil benchmarks, such as Brent and WTI, for sustained price movements. Any further escalation or de-escalation in the Middle East conflict will be a key indicator for the direction of oil prices. Additionally, watch for any announcements from the government or regulators regarding fuel pricing mechanisms and the management of circular debt, as these will directly influence the profitability of OMCs and, to some extent, refineries.