International Oil Prices Drop Below $70: Mixed Impact for PSX Energy and Chemical Stocks

What the drop in international oil prices means

International crude oil prices have recently slipped below the $70 per barrel mark. Brent crude, a global benchmark, was hovering around $76.6 per barrel, while Western Texas Intermediate (WTI) stood at $72.6, both down by about 1.6% in 24 hours. Crude from UAE reserves was reported at $69 per barrel. This decline follows earlier reports of Iran and the US agreeing to war talks mediated by Pakistan and Qatar, which eased some geopolitical tensions that had previously pushed prices higher. While current prices are still above pre-conflict levels, the recent dip below $70 signals a shift in the global oil market.

Why it matters for PSX energy and chemical stocks

The movement of international oil prices is a critical driver for several sectors on the Pakistan Stock Exchange. For Oil & Gas Exploration and Production (E&P) companies, their revenue is directly tied to global crude prices, as their wellhead prices are often dollar-indexed. Refineries, which process crude oil, face a double-edged sword: lower input costs are good, but a sharp price drop can lead to inventory losses on their existing stock. Oil Marketing Companies (OMCs) generally benefit from lower crude prices due to reduced import costs and working capital requirements. Meanwhile, chemical manufacturers that use oil-linked feedstocks see their input costs fall, potentially boosting margins. Power generation companies using furnace oil or LNG also see a reduction in their fuel expenses.

Which stocks, and why

Oil & Gas Exploration (E&Ps) Companies like Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum will likely see a negative impact. Their earnings are directly linked to international crude oil prices through their USD-indexed wellhead prices. A sustained drop in crude means lower revenue per barrel of oil and gas produced.

Refineries The drop in crude prices is generally negative for National Refinery, Attock Refinery, and Pakistan Refinery. While lower crude input costs are beneficial for future processing, a sharp fall in prices typically leads to inventory losses on the crude oil stock they hold. This can temporarily squeeze their profitability.

Oil Marketing Companies (OMCs) For Pakistan State Oil, Attock Petroleum, and Shell Pakistan, the fall in international crude prices is generally positive. Lower crude means reduced import costs for petroleum products, which in turn lowers their working capital requirements and financing costs. This can improve their cash flow and reduce exposure to currency fluctuations on large import bills.

Chemicals Companies such as Lotte Chemical Pakistan and Engro Polymer & Chemicals are likely to see a positive impact. Lotte Chemical, a PTA producer, benefits from lower prices for its oil-linked feedstock (PX). Engro Polymer, the sole PVC producer, also sees its key input, ethylene, become cheaper as crude prices fall. This reduction in feedstock costs can expand their profit margins if product prices remain stable or do not fall as sharply.

Power Generation (IPPs) For IPPs like Hub Power, K-Electric, Nishat Power, and Kot Addu Power that use furnace oil or LNG as fuel, lower crude prices translate to reduced fuel costs. While many IPPs operate on a pass-through tariff mechanism, meaning fuel costs are eventually recovered, lower fuel prices can still positively impact their working capital and potentially ease the accumulation of circular debt by reducing the upfront cost of fuel procurement.

What to watch

Investors should closely monitor the trajectory of international crude oil prices, as sustained movements above or below the $70 threshold will continue to influence these sectors. Geopolitical developments, particularly those involving major oil-producing regions and global powers, will remain a key factor. Additionally, the Pakistani rupee's stability against the US dollar will also play a role, as it affects the local cost of imported crude and the rupee-equivalent revenue for E&P companies.