Economy, Business And Markets

Petroleum Stocks in Hot Waters

Petroleum Stocks in Hot WatersPetroleum Stocks in Hot Waters

An investor holds his face in his hands while eying stock quotes on one of Tehran Stock Exchange’s information boards above the trading floor. Quote after quote prices are falling, more often than not on a gloomy Sunday.

The situation is the same for traders looking at stock prices in the Iran Fara Bourse (over-the-counter) market. The bear market for Iranian equities seems to have fallen in an abyss. One of the worst-hit sectors is petroleum.

Both equity markets are hovering near two-year lows. TSE’s main index, TEDPIX, closed at 62,923.70 points last week, down three-tenth of a percent for the week, and more than 28% lower than its peak two years ago.

This is while, IFB’s index, IFX, peaked two years ago but has lost just over 21% ever since. The less disappointing performance comes mainly because smaller companies listed on IFB have not been as hurt by the economic crisis.

Petrochemical producers, refiners and investment companies focusing on the oil and gas industry, such as Ghadir Investment Company—which has invested 70% of its portfolio in petroleum stocks—roughly constitute 40 to 45% of the equity markets’ total capitalization.

They have been shuffling through crisis for the past half decade.

Sanctions on the Central Bank of Iran increased their export costs, as curbs on oil and gas exports have cut into their profits. They have had a hard time keeping their installations running due to the same reasons. Getting parts for the oil industry has been difficult during the past few years.

Declining exports, scarce parts and falling profits were exacerbated by a sharp drop in oil prices last year. Crude oil prices have been hovering around $50 per barrel for over a year, due to low demand from China and Europe and a supply glut stemming from US shale production and Saudi Arabia’s bid to drive it out of business by keeping prices lower for longer.

Low demand has eroded petroleum companies’ margins that are losing what little export markets sanctions against Iran’s nuclear program left them. However, their feedstock prices have not followed the declining price of their products.

This September, the Oil Ministry announced that gas, as feedstock to petrochemical complexes, would be sold at 13 cents for August-September. The pricing came after months of uncertainty about the pricing method. Earlier, prices varied on a day-to-day basis, making investment and production planning riskier.

According to Deputy Oil Minister Abbas Sheri-Moqaddam, the new prices are determined based on the average selling prices of feedstock to domestic and foreign customers.

Feedstock prices are deduced from a single formula, though final prices may vary depending on the gas consumption rate.  

Recently, the ministers of economy, industry, defense and labor wrote a letter to President Hassan Rouhani, outlining the dire state of the economy. They asked for a reduction of gas feedstock prices in part of the letter to help the petrochemical industry and boost the stock market.

A rally in petrochemical shares could lift both equity markets.

The central bank has backed their proposal, but the oil minister and some top presidential advisors have been against a change in pricing.

Some point to the support extended by Iran’s oil exporting neighbors to their petrochemical producers.

“Iran’s major energy rival Saudi Arabia gives a 30% discount on its feedstock, but Iran’s discount is only 5%,” secretary-general of the Association of Petrochemical Industry Corporations, Ahmad Mahdavi, said. According to market watchers, feedstock prices vary from 6 to 8 cents in the Middle East.

Mohammad Baqer Nobakht, the government’s spokesperson, has signaled a retreat in the government’s policy.

“The Oil Ministry is pursuing the petrochemical feedstock case,” he said on Wednesday.

The bearishness in equities will last for now. And petroleum shares are suffering from multiple ailments that will not go away soon. Creating a better pricing method and reducing the overall average will go a long way to ease pressure off the industry.