Potential Iran-US Deal: Oil Sanctions Waiver to Affect PSX Energy Stocks

What the potential Iran-US deal means for oil supply

Reports indicate a draft memorandum of understanding between the United States and Iran, covering several key issues. A significant part of this potential agreement includes a waiver on US oil sanctions against Iran. This would allow more Iranian crude oil to enter the international market. The draft also mentions the reopening of the Strait of Hormuz to commercial vessels and the lifting of a US naval blockade on Iranian ports, which would further ease global oil transit. If a final deal is reached, which is expected to be discussed over the next 60 days, the increased supply of Iranian oil could lead to a downward trend in international crude oil prices.

Why lower crude prices matter for Pakistan's energy sector

Lower international crude oil prices have distinct effects on different segments of Pakistan's energy sector. For oil and gas exploration companies, their revenue is directly tied to global crude prices because their wellhead prices are typically indexed to the US dollar and international benchmarks. A drop in crude prices would reduce their earnings. Conversely, oil marketing companies (OMCs) and refineries benefit from lower crude prices. OMCs import refined petroleum products, so reduced crude costs mean lower import bills. While their marketing margins are regulated, lower input costs can ease working capital requirements and reduce the risk of inventory losses. Refineries use crude oil as their primary raw material; therefore, a decrease in crude prices directly lowers their feedstock costs, which can improve their refining margins.

Which stocks, and why

• Oil & Gas Development Company (OGDC), Pakistan Petroleum (PPL), Pakistan Oilfields (POL), Mari Petroleum (MARI): These are Pakistan's major oil and gas exploration and production (E&P) companies. Their profitability is closely linked to international crude oil prices. If the potential US-Iran deal leads to an increase in global oil supply and a subsequent fall in crude prices, it would negatively impact their revenue and earnings. Their USD-indexed wellhead prices would fetch less in rupee terms, assuming the rupee-dollar exchange rate remains stable.

• Pakistan State Oil (PSO), Attock Petroleum (APL), Shell Pakistan (SHEL): As oil marketing companies, these firms import significant quantities of refined petroleum products. Lower international crude oil prices would translate into reduced import costs for them. While their retail margins are regulated by the government, lower input costs can improve their cash flow, reduce working capital needs, and potentially lead to inventory gains if prices stabilise after a fall. This would be a positive development for their business operations.

• National Refinery (NRL), Attock Refinery (ATRL), Pakistan Refinery (PRL): These companies operate oil refineries, with crude oil being their primary raw material. A decrease in global crude prices would directly lower their feedstock costs. This reduction in input expenses can lead to an improvement in their refining margins, which is the difference between the cost of crude oil and the selling price of refined products. This would be a positive for their profitability.

What to watch

Investors should closely monitor the ongoing negotiations between the US and Iran. Any official statements regarding the finalisation of a deal, particularly concerning oil sanctions waivers, will be crucial. The immediate reaction of international crude oil benchmarks, such as Brent and WTI, to these developments will be a key indicator of the potential impact on Pakistan's energy sector. Furthermore, the actual volume of Iranian oil that re-enters the market and the pace at which it does so will determine the sustained effect on global oil prices.