Questions

Petrol prices just went up over the weekend. So my question to you is:

1. Will it increase the profits of oil exploration companies like OGDC and PPL?

2. Will it increase the profits of oil marketing companies like PSO and Attock Petroleum?

Answers:

Whenever you hear that petrol prices are going up or down, understand that the Oil and Gas exploration sector like OGDC, PPL, MARI, etc. has nothing to do with it!

Yes, petrol prices are going up because international oil prices must have gone up, but that has already happened. But if you start looking at the sector when petrol prices in Pakistan have gone up, exploration's profits have nothing to do with it.

See, the Oil and Gas sector has three big components.

1. Oil and Gas exploration companies i.e. OGDC, PPL, MARI, etc.

They take the oil out of the ground and send it to the refineries. How much do they charge for it? For the oil, whatever the international oil prices are, and for the gas, whatever the government has allowed them to charge (usually linked to international oil prices)

2. Refineries take this oil and process it to make products like diesel, petrol, kerosene, etc. How much do they make? They make spreads i.e. oil prices minus international product prices. These spreads can be very volatile hence the government allows them to charge deemed duty on diesel so that they have some protection from these volatile spreads.

3. Refineries sell these products to the oil marketing companies like PSO, APL, etc. How do they make money? The government tells them how much profit should they make per liter. So, the more they sell, the more money they make since per-liter margins are locked.

So, OGDC and PPL don't make any extra money when petrol prices go up but Oil marketing companies like PSO and APL do! These are called inventory gains. However, when petrol prices come down, they also make a loss. All this is part of their business!

But we as investors shouldn't be concerned about these. These are normal operations and hence markets also ignore them!

From tomorrow on, we dive deep into oil and gas exploration companies!

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I am Furqan Punjani and I have been a retail investor and a financial analyst for 15 years now! My only goal right now is to help SIMPLE RETAIL INVESTORS make money from the stock market. This newsletter and this free stock market course, are to help investors become better investors.

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