Oil Prices Fall to Pre-War Levels: Impact on Pakistan's Energy and Chemical Stocks

What the fall in crude oil prices means

International crude oil prices have recently fallen to their lowest point since February, reaching levels last observed before the start of the Iran war. Brent crude futures for August delivery dropped by 1.46% to $72.66 a barrel, while U.S. West Texas Intermediate (WTI) lost 1.19%, settling at $69.50 a barrel. This decline is primarily attributed to market expectations of increased supply from the Middle East, with reports indicating that flows through the Strait of Hormuz are now close to pre-war levels, easing earlier supply concerns.

This development signals a shift in the global energy market, where supply dynamics are currently outweighing demand concerns. For an oil-importing nation like Pakistan, lower international crude prices typically translate into reduced import bills and potentially lower fuel costs, which can have ripple effects across various industries.

Why lower crude matters for energy and chemical stocks

The price of crude oil is a fundamental driver for several sectors on the Pakistan Stock Exchange. For oil and gas exploration companies, their revenue is directly tied to international crude prices, as their wellhead prices are often dollar-indexed. A fall in crude prices can therefore reduce their top-line earnings.

Conversely, sectors that rely on crude oil or its derivatives as a key input, such as chemicals, generally benefit from lower prices. Reduced feedstock costs can improve their profit margins. For oil marketing companies (OMCs) and refineries, the immediate impact can be mixed; while lower import costs are beneficial, a rapid decline in crude prices can lead to inventory losses, as they hold stock purchased at higher prices.

For power generation companies, particularly those using furnace oil or LNG, lower crude prices can lead to reduced fuel costs. While many operate on a pass-through tariff model, lower fuel costs can still ease pressure on working capital and potentially slow the accumulation of circular debt in the energy chain.

Which stocks, and why

Oil & Gas Exploration (E&P) companies such as Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum are likely to see a negative impact. Their earnings are closely linked to international crude oil prices, and a sustained drop will directly reduce their revenue from oil and gas production. This is a material hit to their core business.

Oil Marketing Companies (OMCs) including Pakistan State Oil, Attock Petroleum, and Shell Pakistan, will also face a negative impact. While lower crude prices reduce their import costs in the long run, the immediate effect of falling prices is often inventory losses, as the value of their existing fuel stocks declines. This can temporarily squeeze their profitability.

Refinery companies like National Refinery, Attock Refinery, and Pakistan Refinery are similarly affected by inventory valuation. A decline in crude prices can lead to inventory losses on their crude oil feedstock. While lower input costs are generally favourable, the short-term impact from inventory revaluation is typically negative.

Chemicals companies such as Lotte Chemical Pakistan, Engro Polymer & Chemicals, and ICI Pakistan are set to benefit. Lower crude prices translate into reduced costs for their key feedstocks, such as paraxylene (for PTA) and ethylene (for PVC). This reduction in raw material expenses can improve their profit margins, assuming product prices do not fall proportionally.

Power Generation (IPPs) like Hub Power, K-Electric, Nishat Power, and Kot Addu Power may experience a positive, albeit low, impact. Many IPPs use furnace oil or LNG, whose prices are linked to crude. Lower fuel costs can ease their operational expenses and potentially reduce the accumulation of circular debt, even if these costs are largely passed through to consumers via tariffs. This can improve their cash flow situation.

What to watch

Investors should monitor the trajectory of international crude oil prices and any further developments regarding Middle East supply. Key indicators to watch include weekly crude oil inventory reports from major economies and geopolitical updates from the Middle East region. Any sustained rebound in crude prices would reverse the current sentiment for the affected sectors, while continued weakness would reinforce the current trends. Additionally, the rupee-dollar exchange rate will remain crucial, as it influences the local currency equivalent of both crude oil revenues and import costs for Pakistani companies.