Potential US-Iran Peace Deal Could Lower Crude Oil Prices: PSX Oil & Gas, Refinery, and Chemical Stocks Face Impact

What the potential US-Iran deal means for oil prices

News suggesting a possible peace deal between the United States and Iran, a development welcomed by Pakistan and Turkey, carries significant implications for global energy markets. If such an understanding materialises, it could lead to an easing of sanctions on Iran, potentially allowing more Iranian crude oil to enter the international market. An increase in global oil supply, especially from a major producer like Iran, typically puts downward pressure on international crude oil prices.

This potential shift comes amidst ongoing discussions about regional stability and could reshape the supply-demand dynamics that dictate global oil benchmarks like Brent and WTI.

Why lower crude prices matter for PSX stocks

Lower international crude oil prices have a varied impact across different sectors of the Pakistan Stock Exchange. For companies involved in oil and gas exploration, their revenues are often directly tied to these prices. Refineries and oil marketing companies (OMCs) hold inventory, so a drop in prices can lead to short-term inventory losses. On the other hand, industries that rely on oil-linked raw materials, known as feedstock, would see their input costs decrease, potentially boosting their profit margins. Power generation companies, many of whom use furnace oil or re-gasified liquefied natural gas (RLNG), could also benefit from lower fuel expenses.

Which stocks, and why

Companies in the Oil & Gas Exploration sector are most directly exposed to international crude oil prices. Firms like Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum earn revenue from selling oil and gas at wellhead prices, which are often linked to global crude benchmarks. A sustained decrease in crude prices would negatively impact their top-line revenue and profitability. These companies also contend with circular debt, a persistent issue in Pakistan's energy sector where delayed payments across the supply chain create liquidity challenges.

Refinery companies such as National Refinery, Attock Refinery, and Pakistan Refinery typically hold significant crude oil inventory. When crude prices fall, the value of this existing inventory decreases, leading to inventory losses that can hit their short-term earnings. While lower crude prices can also influence refining margins (the difference between crude oil prices and the prices of refined products), the immediate impact from inventory revaluation is often negative.

Oil Marketing Companies like Pakistan State Oil, Attock Petroleum, and Shell Pakistan also maintain fuel inventories. Similar to refineries, a drop in crude prices can result in inventory losses. Although their core profitability is driven by regulated marketing margins, these short-term inventory effects can still influence their quarterly results.

Conversely, companies in the Chemicals sector, which use oil-derived products as feedstock (raw materials), could see a positive impact. For example, Lotte Chemical Pakistan produces PTA (Purified Terephthalic Acid), and its profitability is sensitive to PTA-PX margins, which are influenced by crude oil prices. Similarly, Engro Polymer & Chemicals, the sole local producer of PVC, benefits from lower ethylene costs, which are also crude-linked. Lower feedstock costs would improve their gross profit margins (the difference between sales revenue and the cost of goods sold).

Power Generation companies, including Hub Power, K-Electric, Nishat Power, and Kot Addu Power, often use furnace oil or RLNG for electricity generation. The prices of these fuels are linked to international crude. While most Independent Power Producers (IPPs) operate on a capacity-payment model, meaning they get paid for making capacity available regardless of dispatch, lower fuel costs can still ease the burden of circular debt and improve cash flow dynamics within the energy chain, even if the costs are largely passed through to consumers via tariffs.

What to watch

Investors should closely monitor the progress of any potential US-Iran peace deal and its concrete implications for global oil supply. The most important data points to watch are the actual movements in international crude oil prices, specifically Brent and WTI benchmarks. Any official announcements regarding sanctions relief or increased Iranian oil exports will be key. Domestically, companies' quarterly results will reveal the extent of inventory gains or losses for OMCs and refineries, and changes in feedstock costs for chemical producers. The broader impact on the energy sector's circular debt situation will also be an important indicator to track as part of the energy circular debt theme.