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

What the oil price drop changed

International crude oil prices have recently fallen to what are described as "pre-war levels." This significant drop in global energy benchmarks initially led to a rise in Indian government bonds, though profit-taking later limited these gains. For Pakistan, the key takeaway from this news is the substantial decline in crude oil prices, which acts as a fundamental driver for several sectors of the Pakistan Stock Exchange.

Why it matters for Pakistan's energy and chemical stocks

Crude oil prices are a critical factor for Pakistan's energy and chemical industries. For Oil & Gas Exploration and production (E&P) companies, their revenue is directly tied to international crude prices, as the wellhead prices for the oil and gas they produce are often indexed to global benchmarks. A fall in crude prices therefore directly impacts their top line.

For oil marketing companies (OMCs) and refineries, crude oil is their primary input. A sharp decline in prices typically leads to inventory losses, as they hold stock purchased at higher rates. However, sustained lower prices can also reduce their working capital requirements and potentially boost demand for refined products due to lower retail fuel costs.

Conversely, sectors that use crude oil or its derivatives as feedstock, such as chemical manufacturers, generally benefit from lower prices. Similarly, power generation companies that rely on furnace oil or imported liquefied natural gas (LNG), which are often correlated with crude prices, could see their fuel costs decrease, improving their operating margins.

Which stocks, and why

Oil & Gas Exploration (E&P) Companies:

• Oil & Gas Development Company (OGDC), Pakistan Petroleum (PPL), Pakistan Oilfields (POL), and Mari Petroleum (MARI) are all directly exposed to international crude oil prices. Their earnings are closely linked to the value of the oil and gas they extract. A drop in crude prices is generally negative for their revenue and profitability. This impact is typically high in influence and long-lasting if prices remain depressed.

Oil Marketing Companies (OMCs):

• Pakistan State Oil (PSO), Attock Petroleum (APL), and Shell Pakistan (SHEL) face immediate inventory losses when crude prices fall sharply, as they sell fuel purchased at higher costs. This is a negative impact, likely medium in influence and short-term, as their existing inventory is revalued downwards. However, if lower prices are sustained, it could eventually reduce their working capital needs and potentially stimulate demand.

Refinery Companies:

• National Refinery (NRL), Attock Refinery (ATRL), and Pakistan Refinery (PRL) also experience inventory losses when crude prices decline, similar to OMCs. This is a negative, medium-influence, short-term impact on their profitability due to the revaluation of their crude oil stock.

Chemical Companies:

• Lotte Chemical Pakistan (LOTCHEM), a producer of PTA, and Engro Polymer & Chemicals (EPCL), the sole local PVC producer, use oil-linked feedstocks. Lower crude oil prices generally translate to lower input costs for these companies, which can expand their margins. This is a positive impact, likely medium in influence and long-lasting if crude prices remain low.

Power Generation Companies (IPPs):

• Hub Power (HUBC), K-Electric (KEL), Nishat Power (NPL), and Kot Addu Power (KAPCO) operate power plants that use furnace oil or LNG as fuel. Since the prices of furnace oil and LNG are often correlated with crude oil, a drop in crude prices can lead to lower fuel costs for these IPPs. This is a positive impact, medium in influence and long-lasting, as it can improve their operational profitability, assuming regulatory tariffs adjust with a lag or allow them to retain some benefit.

What to watch

Investors should closely monitor the trajectory of international crude oil prices, specifically Brent and WTI benchmarks, to gauge the sustained impact on these sectors. The next quarterly results from E&P companies, OMCs, and refineries will offer concrete data on how inventory valuations and revenue streams have been affected. For chemical and power companies, tracking feedstock and fuel costs, respectively, will be key to understanding margin improvements. Any shifts in government policy regarding petroleum product pricing or power tariffs in response to global oil price movements will also be important to watch.