Oil Prices Fall for Third Day on US-Iran Talks: E&P, OMC, Refinery Stocks React

What the fall in crude oil prices means

International crude oil prices have extended their decline for a third straight day, with Brent futures dropping 1.1% to $70.78 a barrel and US West Texas Intermediate (WTI) crude falling 1.2% to $67.74 a barrel. This downward movement follows reports from Qatar that indirect talks between the United States and Iran have made positive progress. These discussions are focused on the Strait of Hormuz, a critical chokepoint that handles a significant portion of global oil supply. The market is interpreting the progress in talks as a sign that the strait will remain open, leading to expectations of oversupply and increased competition for market share, which is pushing prices lower.

Why lower oil prices matter for PSX stocks

Lower international crude oil prices have a varied impact across different sectors on the Pakistan Stock Exchange. For companies involved in oil and gas exploration, a decline in crude prices directly affects their revenue, as their wellhead prices are often linked to international benchmarks. Conversely, businesses that rely on crude oil or its derivatives as a key input, such as chemical manufacturers or power generators using furnace oil, could see a reduction in their operating costs. Oil marketing companies and refineries, however, face immediate inventory losses when prices fall, though lower import costs could be a long-term benefit. Exporters, particularly in the textile sector, might also benefit from reduced freight costs, which are typically linked to fuel prices.

Which stocks, and why

Oil and Gas Exploration and Production (E&P) companies, including Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum, are directly exposed to international crude oil prices. Their earnings are significantly influenced by the USD-linked wellhead prices they receive for their oil and gas production. A sustained fall in crude prices is generally negative for their top-line revenue and profitability.

For Oil Marketing Companies (OMCs) like Pakistan State Oil, Attock Petroleum, and Shell Pakistan, the immediate impact of falling crude prices is typically negative due to inventory losses on their existing stock of petroleum products. While lower import costs could eventually benefit their working capital, the short-term effect on their regulated margins can be challenging.

Similarly, refineries such as National Refinery, Attock Refinery, and Pakistan Refinery also face inventory losses when crude prices decline. Their profitability is primarily driven by refining margins, but short-term crude price volatility can impact their inventory valuations negatively.

Chemical manufacturers, specifically Lotte Chemical Pakistan (a PTA producer) and Engro Polymer & Chemicals (a PVC producer), could see a positive impact. Lower crude oil prices can translate into reduced feedstock costs for products like paraxylene (PX) and ethylene, potentially improving their margins if product prices do not fall proportionally.

Power generation companies, or Independent Power Producers (IPPs), including Hub Power, K-Electric, Nishat Power, and Kot Addu Power, may experience a positive effect. Many IPPs use furnace oil or imported liquefied natural gas (LNG) as fuel, whose prices are often linked to crude oil. Lower crude prices could lead to reduced fuel costs, although their tariffs are regulated and often include fuel cost pass-through mechanisms.

Textile exporters, such as Interloop, Nishat Mills, Gul Ahmed Textile, and Kohinoor Textile, could also benefit indirectly. Lower crude oil prices generally lead to reduced global freight and shipping costs, which can improve the competitiveness and profitability of Pakistani exports.

What to watch

Investors should closely monitor the trajectory of international crude oil prices and any further developments in the US-Iran talks. Continued progress towards de-escalation in the Middle East could sustain the downward pressure on oil prices. Conversely, any setbacks or renewed geopolitical tensions could quickly reverse the trend. Domestically, the government's response to changing fuel prices, particularly regarding petroleum product pricing and any adjustments to regulatory duties, will also be important to watch for its impact on local energy companies.