US-Iran Strikes Lift Crude Oil Prices: E&P, OMC, and Refinery Stocks See Positive Impact

What the renewed US-Iran strikes changed for oil prices

International crude oil prices saw an uptick on Monday after a series of retaliatory strikes between the United States and Iran. These actions have highlighted the instability in the region and led to disruptions in energy shipping through the critical Strait of Hormuz. The immediate effect was a rise in global oil benchmarks.

Brent crude futures climbed by 0.8% to $72.57 a barrel, while US West Texas Intermediate (WTI) crude was trading at $70 a barrel. This increase reflects market concerns over potential supply disruptions stemming from the heightened geopolitical tensions in the Middle East.

Why rising crude prices matter for Pakistan's energy stocks

For Pakistan's energy sector, movements in international crude oil prices are a significant driver of profitability. Companies involved in oil and gas exploration, marketing, and refining are directly exposed to these price fluctuations. A rise in crude prices can lead to higher revenues for explorers, inventory gains for marketers and refiners, and potentially improved refining margins.

Pakistan's economy is heavily reliant on imported crude oil and petroleum products, making the country sensitive to global energy price shifts. While higher prices generally mean a larger import bill for the nation, for specific listed companies, the impact on their earnings can be positive, depending on their business model and exposure to crude oil as an input or output.

Which stocks, and why

Oil and Gas Exploration & Production (E&P) companies are typically the primary beneficiaries of rising crude oil prices. Their wellhead prices, which determine the revenue they earn from selling crude oil and natural gas, are often linked to international benchmarks in US dollars. Therefore, when the crude-oil price rises, their top-line revenue increases. This development is positive for companies like Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum. The impact on their earnings is generally high, though the longevity of this benefit depends on how long oil prices remain elevated.

Oil Marketing Companies (OMCs), such as Pakistan State Oil, Attock Petroleum, and Shell Pakistan, also tend to see a positive impact from rising crude prices. These companies maintain inventories of petroleum products. When the cost of crude oil, and consequently refined products, increases, the value of their existing inventory rises. This leads to what are known as 'inventory gains', which can provide a short-term boost to their profitability. This is a medium-influence, short-term positive for OMCs.

Refinery companies like National Refinery, Attock Refinery, and Pakistan Refinery also benefit from higher crude prices. Similar to OMCs, they hold crude oil as inventory for processing. An increase in crude prices enhances the value of this inventory, resulting in inventory gains. Furthermore, if the prices of refined products rise at a faster pace than crude oil, it can lead to improved refining margins, which is the difference between the cost of crude and the selling price of refined products. This is a medium-influence, short-term positive for refiners.

What to watch

Investors should closely monitor the geopolitical situation in the Middle East, as further escalation or de-escalation could significantly impact crude oil prices. The stability of shipping routes, particularly through the Strait of Hormuz, will also be a key factor. Additionally, tracking international crude oil benchmarks like Brent and WTI will provide direct insights into the revenue prospects for E&P companies and the potential for inventory gains for OMCs and refiners. Any sustained shift in global demand or supply dynamics, beyond the immediate geopolitical events, will also play a role in determining the longer-term trajectory of oil prices and, by extension, the earnings of these Pakistani energy stocks.