Oil Prices Fall on US-Iran Talks: E&P, OMC, Refinery Stocks Face Headwinds, Chemicals Gain

What the US-Iran talks changed for oil prices

International crude oil prices saw a notable decline on Monday following the conclusion of talks between the United States and Iran in Switzerland. The discussions reportedly made encouraging progress, with Iran announcing that it had secured waivers for its oil and petrochemical exports. This news has helped to ease concerns about potential supply shortages in global oil markets, leading to a drop in prices. Brent crude, a key international benchmark, fell by over 2% to $78.89 a barrel after having climbed earlier in the day.

Why it matters for energy and chemical stocks

The price of crude oil is a fundamental driver for several sectors on the Pakistan Stock Exchange. For companies involved in exploring and producing oil and gas, higher crude prices generally mean higher revenues and profits because their products are priced with a link to international benchmarks. Conversely, a fall in crude prices can reduce their earnings. For oil marketing companies (OMCs) and refineries, sudden price drops can lead to inventory losses, as they hold significant stocks of crude or refined products purchased at higher prices. However, for sectors that use oil-linked products as their raw material, such as certain chemical manufacturers, lower crude prices can be a positive development, reducing their input costs and potentially improving their profit margins.

Which stocks, and why

This decline in international crude oil prices is likely to have a varied impact across different segments of the PSX energy sector and related industries.

For Oil & Gas Exploration companies like Oil & Gas Development Company (OGDC), Pakistan Petroleum (PPL), Pakistan Oilfields (POL), and Mari Petroleum (MARI), the news is generally negative. These companies primarily earn revenue from selling crude oil and natural gas, whose wellhead prices are often linked to international crude benchmarks. A drop in crude prices directly translates to lower revenue per barrel or per unit of gas, impacting their profitability. Their exposure to circular debt, where payments from power purchasers are delayed, already strains their cash flows, and lower oil prices add further pressure on their top line.

Oil & Gas Marketing companies such as Pakistan State Oil (PSO), Attock Petroleum (APL), and Shell Pakistan (SHEL) could also face headwinds. While their core margins on fuel sales are regulated by OGRA, they often experience inventory gains when crude prices rise and inventory losses when prices fall. A sudden drop in crude prices means their existing fuel stocks, purchased at higher rates, will have to be sold at lower prevailing market prices, potentially leading to inventory losses that can affect their short-term earnings.

Similarly, Refinery companies like National Refinery (NRL), Attock Refinery (ATRL), and Pakistan Refinery (PRL) are also likely to see a negative impact. Refineries hold crude oil as feedstock. A fall in crude prices can lead to inventory losses on this feedstock. Additionally, refining margins, which are the difference between the price of refined products and crude oil, can sometimes come under pressure if product prices fall faster than crude prices.

On the other hand, Chemicals companies that use oil-linked feedstocks stand to benefit. Lotte Chemical Pakistan (LOTCHEM), a producer of PTA (Purified Terephthalic Acid), uses PX (Paraxylene) as a key raw material, which is derived from crude oil. Lower crude prices can reduce the cost of PX, improving LOTCHEM's PTA-PX margins. Similarly, Engro Polymer & Chemicals (EPCL), the sole local producer of PVC (Polyvinyl Chloride), uses ethylene as a primary feedstock, also derived from crude. A reduction in ethylene costs due to lower crude prices would improve EPCL's PVC-ethylene margins, positively impacting its profitability.

What to watch

Investors should closely monitor the trajectory of international crude oil prices, particularly Brent crude, as these will continue to be a primary determinant for the profitability of Pakistan's energy sector. Any further developments in US-Iran relations or other geopolitical events that could impact global oil supply and demand will be crucial. The speed and extent to which lower crude prices translate into reduced feedstock costs for chemical companies will also be important to watch, as this will determine the actual margin expansion for these firms. The next quarterly results from these companies will provide concrete data on how the recent price movements have affected their inventory valuations and operating margins.