West 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). Therefore, WTI prices are an important indicator to watch for those owning domestic energy stocks.
Last week West Texas Intermediate (WTI) crude oil prices rose slightly from $95.72/barrel to $95.86/barrel. WTI prices had risen earlier in the week to $97.51/barrel on Tuesday, however, prices dropped Friday after an unexpectedly negative data point was released about US industrial production (for further discussion please see “US industrial production drops causing oil price decline“).
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. Oil has been range bound recently, however, before that, oil had experienced a rally over the prior several weeks and some market participants have cited positive economic indicators as the drivers for this.
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 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 very slight move upward in prices was relatively neutral 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.