Iran-US Peace Reports Drive Rial Demand: Potential Impact on Oil and Chemical Stocks

What the Iran-US peace reports changed

News has emerged from Pakistan's open currency market about a significant surge in demand for Iranian rials. This buying spree, driven largely by middle-class citizens, reportedly followed speculation about a potential 60-day peace agreement between Iran and the United States. According to Malik Bostan, Chairman of the Exchange Companies Association of Pakistan (ECAP), this increased demand has caused the value of the rial to double in the open market, with transactions worth around Rs. 3 trillion occurring in just five days. Bostan also cautioned the public to use licensed exchange companies for all currency dealings to avoid illicit activities.

The core of this development for the Pakistan Stock Exchange (PSX) is the underlying geopolitical event: a potential Iran-US agreement. Such a development, if it materialises and leads to an easing of sanctions, could potentially increase Iranian oil supply to global markets. An increase in global supply typically puts downward pressure on international crude oil prices.

Why it matters for energy and chemical stocks

International crude oil prices are a critical driver for several sectors on the PSX. For Oil & Gas Exploration companies, their revenue is directly linked to global oil prices. A decline in crude prices would mean lower realisations for their production. Oil Marketing Companies (OMCs) and Refineries also hold crude oil inventory, and a fall in prices can lead to inventory losses, impacting their short-term profitability. Conversely, sectors that use oil-linked products as feedstock, such as the chemicals sector, would benefit from lower input costs, which can expand their profit margins. Integrated power utilities that generate their own electricity using furnace oil or other crude-linked fuels could also see a reduction in their generation costs.

Which stocks, and why

• Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum are all exploration and production (E&P) companies. Their earnings are highly sensitive to international crude oil prices, as their wellhead prices are typically linked to global benchmarks. A potential decline in crude prices, driven by increased Iranian supply, would be negative for their revenue and profitability.

• Pakistan State Oil, Attock Petroleum, and Shell Pakistan are Oil Marketing Companies (OMCs). While their core margins are regulated, they can experience inventory losses when crude oil prices fall rapidly, as the value of their existing stock decreases. This would be a negative, albeit typically short-term, impact.

• National Refinery, Attock Refinery, and Pakistan Refinery are refinery companies. Similar to OMCs, they face potential inventory losses on their crude oil feedstock when prices decline. Their profitability is also driven by refining margins, which can be complex, but a sharp drop in crude can initially be negative due to inventory valuation.

• Lotte Chemical Pakistan and Engro Polymer & Chemicals operate in the chemicals sector. Lotte Chemical produces PTA, which uses oil-linked paraxylene (PX) as a feedstock. Engro Polymer produces PVC, which uses ethylene, also derived from crude oil. Lower crude oil prices would translate into lower feedstock costs for these companies, potentially expanding their profit margins, which is a positive development.

• K-Electric, as a vertically integrated utility, generates a portion of its electricity using furnace oil. A reduction in international crude oil prices could lead to lower furnace oil costs, thereby reducing K-Electric's generation expenses. This would be a positive for the company's cost structure.

What to watch

Investors should closely monitor developments regarding the reported Iran-US peace agreement, specifically any official confirmations or details about sanction relief and its potential impact on Iranian oil exports. The most crucial indicator to watch will be the movement of international crude oil prices (Brent and WTI) in response to these geopolitical shifts. Any sustained downward trend in crude prices would confirm the channel of impact for the listed companies. Additionally, tracking the actual volume of Iranian oil exports, if sanctions are indeed eased, will provide further clarity on the supply side of the global oil market.