WTI crude finished up slightly last week, closing over $96/barrel

2013.05.12 - WTI LTEnlarge Graph

  • WTI crude prices rose for the week ended May 10th, from $95.61/barrel to $96.04/barrel, resulting in a positive for domestic producers of oil.
  • This is the third consecutive week that oil rallied, gaining 9% since three Fridays ago. Oil dipped below $87/barrel in mid-April, off of highs of $97/barrel in early April. Over the past three weeks, oil has recovered most of its losses and currently trades around $96/barrel.

West Texas Intermediate (WTI) crude (priced at Cushing, Oklahoma) is the benchmark crude for U.S. 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 increased from $95.61/barrel to $96.04/barrel. This was the second consecutive week that oil prices increased, after three consecutive weeks of declines. Oil reached ~$97/barrel in early April, but slid throughout the month to touch below $87/barrel at points. Since late March, prices slid downwards as weak growth numbers out of China, lower forecast oil demand by energy agencies, and a broad sell-off in commodities were a drag on oil prices. Over the past two weeks, oil recovered most of its losses, with positive unemployment figures and jobless claims figures coming out of the U.S. The commodity currently trades at the ~$96/barrel level.

2013.05.12 - WTI STEnlarge Graph

Note that WTI is more representative of the price that producers receive in the U.S. 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, see WTI-Brent spread closed under $8/barrel last week, down over 60 percent since early February. 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 U.S.-concentrated companies in the energy space) have largely moved in the same direction over the past several years.

2013.05.12 - WTI vs XLE vs EOGEnlarge Graph

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 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.