US-Iran Peace Accord: E&P, Refinery Stocks Face Headwinds; Chemical Sector May Benefit

What the US-Iran peace accord means for regional stability

Prime Minister Shehbaz Sharif announced that Pakistan will host the signing ceremony for a peace agreement between the United States and Iran in Geneva, Switzerland, later this week. This significant development points to a de-escalation of tensions between the two nations, despite recent regional incidents like an Israeli strike on Lebanon.

The potential for a lasting peace accord between the US and Iran is expected to reduce geopolitical risks in the Middle East. This includes concerns over the security of vital oil supply routes, such as the Strait of Hormuz. Historically, heightened tensions in the region have often led to an increase in the risk premium embedded in international crude oil prices. Conversely, a reduction in these tensions typically translates to a softening of crude oil prices as supply fears subside.

Why lower crude oil prices matter for PSX stocks

The primary economic channel through which this news impacts the Pakistan Stock Exchange is the potential for a sustained reduction in international crude oil prices. For Pakistani companies, crude oil prices are a critical driver for several sectors:

• Oil & Gas Exploration (E&P): Their revenue is directly linked to international crude and gas prices.
• Refineries: Profitability is affected by inventory valuations and refining margins, which are sensitive to crude price movements.
• Oil & Gas Marketing Companies (OMCs): Import costs and working capital requirements are heavily influenced by crude prices.
• Chemicals: Many chemical producers use crude oil derivatives as key feedstocks, making their input costs sensitive to global oil markets.

Which stocks, and why

Oil & Gas Exploration (E&P): Companies like Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum derive a substantial portion of their revenue from the sale of crude oil and gas, with wellhead prices often indexed to international benchmarks. A sustained reduction in global crude oil prices, driven by easing geopolitical tensions, would likely lead to lower revenue and profitability for these companies.

Refineries: National Refinery, Attock Refinery, and Pakistan Refinery are sensitive to crude oil price movements. While refining margins (the difference between product prices and crude input costs) are complex, a falling crude price environment often results in inventory losses, which can negatively impact their earnings. Refineries typically benefit from inventory gains when crude prices are rising.

Oil & Gas Marketing Companies (OMCs): Pakistan State Oil, Attock Petroleum, and Shell Pakistan import a significant volume of refined petroleum products. Lower international crude oil prices generally translate to reduced import costs and lower working capital requirements, which is a positive for their operations. While OMCs also book inventory gains when crude prices rise, the overall reduction in input costs from a de-escalation of Middle East tensions is generally beneficial.

Chemicals: Producers such as Lotte Chemical Pakistan, Engro Polymer & Chemicals, and ICI Pakistan often use crude oil derivatives as primary feedstocks. For example, PTA production (Lotte Chemical) relies on PX, which is linked to crude, and PVC production (Engro Polymer) uses ethylene, also a crude-linked derivative. Lower crude oil prices typically lead to reduced feedstock costs, which can improve their profit margins, assuming product prices do not fall proportionally. ICI Pakistan, with its diversified chemical portfolio, could also see some benefit from reduced input costs.

What to watch

Investors should closely monitor the actual signing of the peace accord and any further details that emerge regarding its scope and implementation. The most immediate indicator will be the movement of international crude oil benchmarks, such as Brent and WTI, in the days and weeks following the announcement. Any renewed geopolitical flare-ups in the Middle East could quickly reverse the sentiment. Additionally, watch for company disclosures in upcoming quarterly results regarding inventory valuations and refining margins, particularly for the energy sector.

This development is part of a broader theme of Middle East tensions and their impact on global commodity markets.