Why oil, natural gas, and natural gas liquids prices have risen

Part 3
Why oil, natural gas, and natural gas liquids prices have risen (Part 3 of 5)

Crude oil prices move higher on geopolitical tensions in Iraq

WTI crude oil prices rose on the week

On June 13, the price of the WTI crude front month contract closed at $106.91 per barrel—up sharply from the prior week’s close of $102.66 per barrel. WTI crude oil prices moved higher during the week, as news sources reported that the geopolitical situation in Iraq was becoming more unstable, with al Qaeda–associated forces taking over the Iraqi city of Mosel and moving towards Baghdad. Though production hasn’t been significantly affected yet by these actions, the markets speculated that oil and gas activity could eventually be disrupted, pushing crude oil prices.

2014.06.16 - WTI STEnlarge Graph

WTI crude prices have remained relatively high and stable over the past year

For most of the last two years, WTI crude oil has been range-bound between ~$85 per barrel and ~$110 per barrel. Higher crude prices generally have a positive effect on stocks in the energy sector. Upstream names that produce oil and gas see higher revenues, cash flows, and returns from higher oil prices. As a result, this causes upstream companies to invest more money in drilling more oil wells, which benefits oilfield service companies as well.

2014.06.16 - Crude vs ETFsEnlarge Graph

The previous graph shows WTI crude oil price movements compared to a few major energy ETFs as well as ExxonMobil (XOM). The ETFs displayed are the Energy Select Sector SPDR (XLE), the Market Vectors Oil Services ETF (OIH), and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). The XLE OIH is a cap-weighted ETF with holdings in upstream energy (including both independents and integrateds), downstream energy, and oilfield services with a large weighting towards megacaps such as ExxonMobil (XOM) and Schlumberger (SLB). The OIH ETF is a cap-weighted ETF focused on oilfield services. XOP is an equal-weighted ETF focused on upstream energy companies.

Oil prices moved higher last week, which was a bullish signal for oil producers. Plus, the longer-term elevated and stable action of oil prices has been a positive indicator for many major energy companies, such as XOM and SLB, and energy ETFs such as XLE, XOP, and OIH.

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