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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). Consequently, WTI prices are an important indicator to watch for those owning domestic energy stocks.
Last week West Texas Intermediate (WTI) crude oil prices rose after two consecutive weeks of price drops, from $90.68/barrel to $91.95/barrel. WTI prices reached almost $98/barrel at the beginning of February, but slid throughout the month to lows of ~$90/barrel in early March. Oil prices recovered somewhat last week and now the commodity trades at ~$92/barrel. Factors behind oil’s price recovery include a better than expected US initial jobless claims figure, and a better than expected report on the US unemployment rate. For more on this, please see “Surprisingly strong employment figures support oil prices and stocks”.
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 top graph shows historical WTI crude oil prices. For most of this past year, oil has been range-bound between ~$85/barrel to ~$95/barrel. 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 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 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.
© 2013 Market Realist, Inc.