Oil Prices Climb 2% on Middle East Supply Worries: E&P Stocks Positive, Chemicals and Power Negative

International crude oil prices saw an increase of approximately 2% on Thursday, following reports of a cargo vessel being struck by an unknown projectile near Oman. This incident has raised concerns about the stability of oil flows through the critical Strait of Hormuz, especially in the context of ongoing geopolitical tensions in the Middle East. The immediate market reaction reflects worries about potential supply disruptions, pushing global oil benchmarks higher.

What the 2% oil price climb changed

The news of a vessel being hit near Oman, and subsequent reports of Iran's involvement, immediately tightened market sentiment around global oil supply. The Strait of Hormuz is a vital chokepoint for a significant portion of the world's oil shipments. Any perceived threat to this route typically leads to an upward movement in crude oil prices, as traders price in the risk of supply disruptions. This 2% climb reflects that immediate concern, signaling higher costs for crude oil globally.

Why higher crude matters for energy and chemical stocks

For Pakistan's stock market, movements in international crude oil prices have a direct and often significant impact on several key sectors. Oil and gas exploration and production (E&P) companies are typically beneficiaries of rising crude prices, as their wellhead prices for oil and gas are often linked to international benchmarks, meaning they earn more revenue. Conversely, sectors that rely on crude oil or its derivatives as a primary input, such as chemical manufacturers and power generation companies, face higher operational costs. Oil marketing companies (OMCs) and refineries can see short-term inventory gains when prices rise, but sustained increases can also lead to higher working capital requirements and potential foreign exchange losses on imports.

Which stocks, and why

The immediate impact of a 2% rise in crude oil prices is generally positive for Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum. As exploration and production companies, their earnings are directly tied to international oil and gas prices. Higher crude prices translate into better realizations for their output, which can boost their profitability. This is a direct economic channel for these companies.

For oil marketing companies like Pakistan State Oil, Attock Petroleum, and Shell Pakistan, a short-term rise in crude prices can lead to inventory gains. This means the fuel they hold in stock, purchased at lower prices, can be sold at higher prevailing market rates. However, this benefit is typically short-lived and can be offset by higher import costs and working capital needs if prices remain elevated for longer.

Similarly, refineries such as National Refinery, Attock Refinery, and Pakistan Refinery can also experience inventory gains from a sudden increase in crude oil prices. Their profitability is also influenced by refining margins, which can be complex, but the immediate effect of rising crude often includes a positive inventory revaluation.

On the other hand, companies in the chemicals sector, like Lotte Chemical Pakistan and Engro Polymer & Chemicals, face a negative impact. Their primary feedstocks, such as paraxylene (PX) for PTA (used by Lotte Chemical) and ethylene for PVC (used by Engro Polymer), are derivatives of crude oil. Higher crude prices mean increased input costs, which can squeeze their profit margins unless they can fully pass on these costs to customers. ICI Pakistan, a diversified chemicals producer, also faces similar cost pressures, though its broader portfolio might dilute the overall impact.

Power generation companies, including Hub Power, Kot Addu Power, Nishat Power, and K-Electric, are also negatively affected. Many of these rely on imported fuels like furnace oil or re-gasified liquefied natural gas (RLNG), both of which are priced based on international crude oil benchmarks. Higher fuel costs increase their operational expenses. While IPPs typically have pass-through mechanisms for fuel costs, delays in payments due to circular debt can exacerbate the impact of higher input prices, affecting their cash flows.

What to watch

Investors should closely monitor the geopolitical situation in the Middle East, particularly any further developments regarding shipping security in the Strait of Hormuz. Sustained tensions or actual disruptions could lead to further increases in crude oil prices. Additionally, tracking global oil inventory levels and demand forecasts will be crucial. For local companies, the ability of OMCs and refineries to manage working capital and the pass-through of fuel costs for power producers will be key indicators to watch in their upcoming quarterly results.