Iran Deal Talk: Oil & Gas Stocks React to Potential Crude Price Shift

What the Iran deal talk changed

Former US President Donald Trump recently stated that a peace deal with Iran was just hours away from being signed, though he noted an Israeli strike had caused a brief delay. This news, if it materialises into an actual agreement, could significantly alter the global oil supply landscape.

An Iran deal typically involves the lifting of sanctions, which would allow Iran to re-enter the international oil market with its substantial crude oil reserves. This potential increase in global supply could put downward pressure on international crude oil prices.

Why it matters for energy stocks

For Pakistan's stock market, a shift in global crude oil prices is a major driver for several sectors, particularly those involved in oil and gas exploration, marketing, refining, and petrochemicals. Companies in these sectors have their revenues or costs directly tied to the price of crude oil.

Lower crude oil prices generally mean reduced revenue for companies that extract oil, as their product sells for less. Conversely, for companies that import and process crude oil, lower prices can mean reduced input costs, which can be a positive for their profitability, assuming their product prices do not fall by the same amount or more.

Which stocks, and why

Oil and gas exploration and production (E&P) companies like Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum are directly exposed to international crude oil prices. Their wellhead prices for oil and gas are often linked to global benchmarks. If an Iran deal leads to a sustained drop in crude prices, it would negatively impact their top line and earnings. This is a significant factor for their business models.

For oil marketing companies (OMCs) such as Pakistan State Oil, Attock Petroleum, and Shell Pakistan, lower crude prices generally translate to lower import costs for petroleum products. While their retail margins are regulated, a reduction in input costs can be beneficial for their working capital and overall cost structure. However, a sharp decline in prices can also lead to inventory losses on existing stock, which is a short-term negative.

Refinery companies like National Refinery, Attock Refinery, and Pakistan Refinery also see their input costs fall with lower crude prices. Their profitability is driven by refining margins, which is the difference between the price of crude oil and the prices of refined products. If crude prices fall more than product prices, their margins can improve. However, like OMCs, they can face inventory losses if prices drop suddenly.

In the chemicals sector, companies like Lotte Chemical Pakistan and Engro Polymer & Chemicals use oil-linked feedstocks for their products (PTA and PVC, respectively). Lower crude prices can reduce their raw material costs. This could be positive for their margins if the selling prices of their finished products do not decline proportionally, thereby improving their product-to-feedstock spread, also known as margins.

What to watch

Investors should closely monitor developments regarding the actual signing of any US-Iran deal and the subsequent market reaction to global crude oil prices. The key will be whether the deal materialises and if it leads to a sustained increase in Iranian oil supply. The response of OPEC+ (Organization of the Petroleum Exporting Countries and its allies) to any new supply entering the market will also be crucial, as they may adjust their own production quotas to stabilise prices. Any concrete data on Iranian oil exports and global inventory levels will provide further clarity on the impact on the crude-oil market and, by extension, on PSX energy stocks.