WTI crude oil rallied 4 percent, recovered 2 weeks of losses

2013.06.10 - WTI Crude STEnlarge Graph

  • WTI crude finished up for the week ended June 7th, closing at $96.03/barrel compared to $91.97/barrel a week prior. This resulted in a positive signal for domestic producers of oil.
  • From a medium-term perspective, oil prices have been relatively stable and range-bound in the $85 to $100 per barrel area.
  • News sources reported that oil prices rallied on strong employment data, as non-farm payrolls figures exceeded expectations.

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 that 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 up as WTI finished at $96.03/barrel on Friday, June 7th compared to $91.97/barrel a week earlier. During the week, crude inventories decreased far more than expected (see here for more). Additionally, non-farm payrolls increased more than expected (see here for more).

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 Better takeaway capacity has caused WTI-Brent spread to trade at narrowest point since 2011. 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, 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.

2013.06.10 - WTI vs XLE vs XOM - 3Enlarge 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, and 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.

The Realist Discussions