Domestic producers such as EOG hurt by slide in WTI prices

2013.02.25 - WTI vs XLE vs EOGEnlarge GraphWest Texas Intermediate (WTI) crude is the benchmark crude for US oil. Therefore, movements in WTI oil prices are a major driver in the valuation of domestic oil producers. Higher oil prices also incentivize producers to spend more money on drilling, which results in increased revenues for oilfield service companies (that is, companies which provide services such as drilling, fracking, and well servicing). Consequently, WTI prices are an important indicator to watch for those owning domestic energy stocks.

Last week West Texas Intermediate (WTI) crude oil prices dropped again from $95.86/barrel to $93.13/barrel. WTI prices had risen earlier in the week to $96.66/barrel on Tuesday, however, prices dropped throughout the week given several data points including a higher than expected increase in crude inventories, weaker than expected US jobs data, and concerns about the Eurozone economy.

Note that WTI is more representative of the price that producers receive in the US and there is another benchmark for crude called Brent which is more representative of the price that producers receive internationally. For more on the price difference between the two, please see “WTI-Brent spread narrowed on the week, but still remains wide favoring international producers“. As the domestic benchmark, WTI prices matter more for domestic companies such as Chesapeake Energy (CHK), Range Resources (RRC), EOG Resources (EOG), and Pioneer Natural Resources (PXD).

The below graph shows historical WTI crude oil prices. For most of this past year, oil has been range-bound between ~$85/barrel to ~$95/barrel.

2013.02.25 - WTI Crude Prices STEnlarge Graph

As previously mentioned, higher crude prices generally have a positive effect on stocks in the energy sector. The below graph shows WTI crude oil price movements compared to XLE and EOG on a percentage change basis from January 2007 onward. One can see that crude oil, the XLE ETF, and EOG (one of the largest US-concentrated companies in the energy space) have largely moved in the same direction over the past several years.

As demonstrated in the WTI Crude Oil graph above, crude oil prices are a major driver in the valuation of many energy investments. Oil prices affect the revenues of oil producers, and therefore the amount of money oil producers are incentivized to spend on oilfield services, therefore this week’s downward movement in prices was a short-term negative for the sector. Investors with domestic energy holdings in names such as CHK, EOG, RRC, or PXD may find it prudent to track the movements of benchmarks such as WTI crude.

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