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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 were down as WTI finished at $91.97/barrel on Friday, May 31st compared to $94.15/barrel a week earlier. News sources reported that part of the decline was attributed traders’ bearish outlook given OPEC’s decision to maintain supply at 30 million barrels per day, despite increasing supply from the U.S. and Canada.
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 Spread between WTI crude oil and Brent oil has closed in significantly since YE2012. 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 Saudi Arabian Oil Minister, Ali al-Naimi, commented on May 31st that $100 per barrel for Brent oil was a reasonable price. Brent crude oil currently trades around the $100 to $102 per barrel level, and WTI currently trades around the $92 to $93 per barrel level.
For most of this past year, WTI crude oil has been range-bound between ~$85/barrel to ~$100/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.
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, though the longer-term stable and elevated price of oil has generally been positive. 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.