Oil Prices Fall Below $80 on Iran Waivers: E&P, Refinery, OMC Stocks Face Headwinds, Chemicals Gain

What the oil price drop changed

International crude oil prices, specifically Brent futures, saw a decline of 1.9% in Asian trade, settling at $79.04 per barrel. This drop was primarily triggered by news that Iran has secured waivers for its oil and petrochemical exports under an interim deal with the United States. This move has eased concerns about potential global supply shortages, which had previously kept oil prices elevated. The current prices are now nearing levels seen before recent geopolitical tensions escalated.

Why it matters for energy and chemical stocks

For Pakistan's stock market, the movement in global crude oil prices is a significant driver for several sectors. Companies involved in Oil & Gas Exploration (E&P) see their revenues directly linked to international crude prices, as their wellhead prices are often dollar-indexed. A fall in crude prices typically means lower revenue for them. Similarly, Oil & Gas Marketing companies (OMCs) and refineries are exposed to inventory gains or losses; a sudden drop in crude can lead to losses on higher-priced stock they hold. Conversely, sectors that rely on crude oil or its derivatives as a primary feedstock, such as certain chemical manufacturers, can see their input costs decrease, potentially improving their profit margins.

Which stocks, and why

• Oil & Gas Development Company (OGDC), Pakistan Petroleum (PPL), Pakistan Oilfields (POL), and Mari Petroleum (MARI): These major E&P companies are negatively impacted by falling crude oil prices. Their earnings are directly tied to the price of oil and gas they extract, which are often benchmarked against international rates. A sustained drop in crude means lower revenue per barrel or unit of gas sold.

• Pakistan State Oil (PSO), Attock Petroleum (APL), and Shell Pakistan (SHEL): As OMCs, these companies are exposed to inventory losses when crude prices fall. They typically hold inventory purchased at higher prices, and a sudden drop means they sell that product at a lower market rate, impacting their profitability. While their core business relies on regulated margins, inventory valuation can cause significant swings.

• National Refinery (NRL), Attock Refinery (ATRL), and Pakistan Refinery (PRL): Refineries also face negative implications from falling crude prices due to potential inventory losses on their crude oil stock. Their profitability is also influenced by refining margins, or crack spreads, which represent the difference between crude oil and refined product prices. While the news doesn't detail crack spreads, a drop in crude can affect inventory values.

• Lotte Chemical Pakistan (LOTCHEM) and Engro Polymer & Chemicals (EPCL): These chemical manufacturers use oil-linked feedstocks, such as paraxylene (PX) for PTA (purified terephthalic acid) production by LOTCHEM, and ethylene for PVC (polyvinyl chloride) production by EPCL. A decline in crude oil prices generally translates to lower feedstock costs, which can improve their gross profit margins if product prices remain stable or do not fall proportionally.

What to watch

Investors should closely monitor the stability of the US-Iran deal and any further developments regarding Iran's oil exports. Any changes to the waivers or renewed tensions in the Middle East could quickly reverse the current trend in crude oil prices. Additionally, keeping an eye on global oil demand forecasts and inventory levels will provide further clues on the potential trajectory of crude prices, which will directly influence the earnings outlook for the listed energy and chemical companies.