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Brent crude is viewed as the benchmark crude for international oil prices. Therefore, movements in Brent oil prices are a major driver in the valuation of international 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, Brent crude prices are an important indicator to watch for those owning international energy stocks.
Last week, Brent crude prices declined slightly, from $110.85/barrel to $109.82/barrel. Brent prices reached almost $119/barrel in mid-February, but slid through the back half of the month to ~$110/barrel in early March. Brent oil prices have been stable through the beginning of March at ~$110/barrel.
Note that Brent crude does not properly reflect the price that producers within the US receive. For domestic producers, WTI is a more appropriate benchmark, mainly due to a recent surge in domestic crude production which has struggled to find sufficient transportation and outlets to bring WTI prices in line with Brent prices. For more on the price difference between the two, please see “WTI-Brent spread narrowed again last week, positive catalyst for domestic oil producers“. Also, Brent represents a certain grade of crude, and differences in the qualities of oil can affect the price that producers receive. Nevertheless, most market participants view Brent as the international oil benchmark, and price movements in Brent affect international energy stocks such as Exxon Mobil (XOM), Chevron Corp. (CVX), ConocoPhillips (COP), and Anadarko Petroleum Corp. (APC).
The top graph shows historical Brent crude oil prices. For most of this past year, Brent crude has been range-bound between ~$110/barrel to ~$120/barrel. As previously mentioned, higher crude prices generally have a positive effect on stocks in the energy sector. The below graph shows Brent crude oil price movements compared to XLE and XOM on a percentage change basis from January 2007 onward. One can see that crude oil, the XLE ETF, and XOM 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 consequently affect the amount of money oil producers are incentivized to spend on oilfield services. Therefore, this week’s upward movement in prices was a short-term positive for the sector. Investors with energy holdings in names with international exposure such as XOM, CVX, COP, and APC as well as the XLE (Energy Select Sector SPDR) ETF may find it prudent to track the movements of benchmarks such as Brent crude.
© 2013 Market Realist, Inc.