Oil Prices Drop Below $70: E&P, OMC, Refinery Stocks Face Headwinds, Chemicals Gain

What the fall in oil prices means

International crude oil prices are on track to drop below $70 per barrel, a level not seen in almost two years. Western Texas Intermediate (WTI) and Brent crude have both seen declines, with UAE crude also falling significantly. This downward trend is largely attributed to two key factors: Pakistan's mediation efforts in talks between Iran and the US, which signals a potential de-escalation of tensions, and the resumption of normal vessel movement through the crucial Strait of Hormuz. These developments suggest a reduction in geopolitical risk premiums that had previously supported higher oil prices.

Why it matters for energy and chemical stocks

Lower international crude oil prices directly impact a range of sectors on the Pakistan Stock Exchange. For Oil & Gas Exploration (E&P) companies, whose wellhead prices are often linked to global crude benchmarks, a sustained fall in prices means reduced revenue. Oil Marketing Companies (OMCs) and refineries can face inventory losses if they hold higher-priced crude or refined products as prices decline. Conversely, sectors that use crude derivatives as feedstock, such as chemicals, or those that rely on furnace oil or LNG for power generation, could see their input costs decrease, potentially improving margins.

Which stocks, and why

Oil & Gas Exploration (E&P) Companies: Companies like Oil & Gas Development Company (OGDC), Pakistan Petroleum (PPL), Pakistan Oilfields (POL), and Mari Petroleum (MARI) will likely experience a negative impact. Their earnings are closely tied to international crude prices, as their wellhead gas and oil prices are often indexed to the US dollar and global benchmarks. Lower crude prices directly translate to lower revenue per barrel or MMBtu, affecting their profitability.

Oil Marketing Companies (OMCs): For Pakistan State Oil (PSO), Attock Petroleum (APL), and Shell Pakistan (SHEL), falling crude prices can be negative in the short term. While their regulated margins are thin, a sharp drop in prices can lead to inventory losses, where the value of their existing fuel stock decreases before it can be sold. This can temporarily squeeze their profitability.

Refineries: National Refinery (NRL), Attock Refinery (ATRL), and Pakistan Refinery (PRL) are also likely to face headwinds. Similar to OMCs, they are exposed to potential inventory losses on crude oil purchased at higher prices. Additionally, refining margins, which are the difference between crude oil costs and refined product prices, can be volatile and may come under pressure if product prices fall faster than crude.

Chemical Companies: For Lotte Chemical Pakistan (LOTCHEM) and Engro Polymer & Chemicals (EPCL), the news is generally positive. LOTCHEM, a PTA producer, uses paraxylene (PX) as a key feedstock, whose price is influenced by crude oil. EPCL, the sole PVC producer, relies on ethylene, also a crude derivative. Lower crude prices typically lead to lower feedstock costs, which can expand their profit margins, assuming product prices remain stable or do not fall proportionally.

Power Generation Companies (IPPs): Hub Power (HUBC), K-Electric (KEL), Nishat Power (NPL), and Kot Addu Power (KAPCO) could see a slight positive impact. Many IPPs use furnace oil or imported LNG, whose prices are linked to international crude. While their earnings are largely determined by capacity payments and power tariffs, lower fuel costs can improve operational efficiency and potentially ease working capital pressures, even if the savings are largely passed through to consumers.

What to watch

Investors should closely monitor the trajectory of international crude oil prices and any further developments in US-Iran relations or the stability of shipping routes in the Middle East. The actual impact on OMCs and refineries will depend on the speed and magnitude of price changes relative to their inventory cycles. For chemical companies, the key will be how feedstock prices (like PX and ethylene) move in relation to their end-product prices. Any sustained shift in the crude-oil price environment will continue to shape the outlook for these sectors.