Oil Prices Fall to Pre-War Levels: E&P, OMCs, Refineries Face Headwinds; Chemicals, Power Benefit

What the oil price drop changed

International crude oil prices, specifically Brent and West Texas Intermediate (WTI), have fallen to their lowest levels since late February, before the US-Israeli strikes on Iran. Brent crude futures for August delivery were trading around $73.49 a barrel, while U.S. West Texas Intermediate was at $70.10 a barrel. This decline is attributed to expectations of rising oil supply from the Middle East, outweighing concerns about global demand.

This drop means that the cost of crude oil, a fundamental commodity for many industries, has significantly decreased from its recent highs. For Pakistan, a net importer of crude oil and petroleum products, this shift in global prices has direct implications for various sectors on the Pakistan Stock Exchange (PSX).

Why it matters for energy and chemical stocks

The price of crude oil is a critical driver for Pakistan's energy sector. Exploration and Production (E&P) companies, which extract oil and gas, see their revenues directly linked to international crude prices. Oil Marketing Companies (OMCs) and refineries, on the other hand, import crude or refined products, making their input costs highly sensitive to these global benchmarks.

For E&P firms, lower crude prices generally mean lower earnings. For OMCs and refineries, the immediate impact can be inventory losses if they hold stock purchased at higher prices. However, in the longer term, lower crude prices also mean reduced import costs for future purchases. Chemical companies that use crude-linked feedstocks, such as naphtha or ethylene, typically benefit from lower input costs, which can improve their profit margins. Power generation companies that rely on furnace oil or imported LNG, both of which are influenced by crude prices, could also see a reduction in their fuel expenses, potentially easing pressure on the energy sector's circular debt.

Which stocks, and why

Oil & Gas Exploration (E&P) companies are directly exposed to international crude prices. Companies like Oil & Gas Development Company (OGDC), Pakistan Petroleum (PPL), Pakistan Oilfields (POL), and Mari Petroleum (MARI) derive a significant portion of their revenue from oil and gas sales, which are often priced in US dollars and linked to global crude benchmarks. A sustained drop in crude prices is generally negative for their top-line revenue and profitability, as their realised wellhead prices would decline.

Oil Marketing Companies (OMCs) such as Pakistan State Oil (PSO), Attock Petroleum (APL), and Shell Pakistan (SHEL) face a mixed bag. In the short term, a sharp fall in crude prices can lead to inventory losses, as they might have purchased fuel at higher prices that now needs to be sold at lower, market-adjusted rates. However, lower crude prices also mean reduced import costs for future inventory, which can be positive for working capital management and potentially ease the accumulation of circular debt in the energy chain. The immediate impact of inventory losses is likely to be negative.

Refineries like National Refinery (NRL), Attock Refinery (ATRL), and Pakistan Refinery (PRL) are also vulnerable to inventory losses when crude prices fall rapidly, as they hold crude oil stock for processing. Their profitability is also influenced by refining margins, which are the difference between the price of crude oil and the prices of refined products. While refining margins do not always move in lockstep with crude, inventory valuation is a key factor.

Chemical companies stand to benefit from lower crude prices. Lotte Chemical Pakistan (LOTCHEM), a producer of PTA (Purified Terephthalic Acid), and Engro Polymer & Chemicals (EPCL), the sole local producer of PVC (Polyvinyl Chloride), use feedstocks that are derivatives of crude oil. Lower crude prices translate into lower input costs for these companies, which can expand their profit margins, assuming product prices remain relatively stable or do not fall as sharply.

Power Generation companies (IPPs) such as Hub Power (HUBC), K-Electric (KEL), Nishat Power (NPL), and Kot Addu Power (KAPCO) often use furnace oil or imported LNG for electricity generation. While their returns are largely determined by capacity payments and regulated tariffs, lower fuel costs can reduce their working capital requirements and the overall value of receivables tied up in circular debt. This can be a low-influence positive, as it eases operational liquidity, even if the fuel cost is typically a pass-through item in their tariff structure.

What to watch

Investors should monitor the trajectory of global crude oil prices and any further developments in Middle East tensions that could impact supply. The sustainability of the current lower price levels will be key. For E&P companies, quarterly earnings reports will show the direct impact on their revenues. For OMCs and refineries, watch for inventory valuation adjustments in their financial statements. For chemical and power companies, the impact on their cost of goods sold and working capital will be important indicators to track in upcoming results. Any changes in government policy regarding petroleum product pricing or subsidies could also alter the impact of crude price movements on local companies.