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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 dropped from $92.70/barrel to $91.29/barrel. This was the second consecutive weekly decline after a prolonged rally through most of March when crude rose from ~$90/barrel to reach ~$97/barrel. During the trading session on Monday, oil continued to drop to close at $88.71/barrel, the lowest closing price since December 2012. Weak growth numbers out of China (one of the world’s largest consumers of oil), accompanied by a broad sell-off in commodities were a drag on oil prices.
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 widened slightly last week after eight consecutive weeks of narrowing”. 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).
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 past 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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