Why prices of different crude oil grades impact energy investment
Prices of different crude oil grades can impact energy investment
When West Texas Intermediate (or WTI) trades below Brent, this generally means companies with oil production concentrated in the U.S. will have lower prices compared to their international counterparts. WTI is the U.S. benchmark and Brent is the international benchmark. For example, see the following chart for a comparison of oil prices for U.S.-concentrated companies versus companies with a global production profile.
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1Q14 average price per barrel
Benchmark oil prices
West Texas Intermediate $98.61
1Q14 realized oil prices per barrel, excluding hedge gains or losses
Chesapeake Energy (CHK) $93.60
Concho Resources (CXO) $92.35
Range Resources (RRC) $85.13
Oasis Petroleum (OAS) $89.66
Total Corporation (TOT) $102.10
ExxonMobil (or XOM) $99.82
Chevron Corporation (or CVX) $96.78
From an investment point of view, if Brent is expected to continue to trade significantly above WTI, investors might favor buying oil names that receive crude prices closer to the Brent benchmark than the WTI benchmark. Generally, this would represent oil names with more international production relative to U.S. domestic production.
The U.S. Energy Information Administration (the EIA), in its monthly Short-term Energy Outlook report dated July 8, 2014, forecast that the average 2014 prices for WTI and Brent would be $100.98 per barrel and $109.55 per barrel, respectively. This results in an average spread of ~$9 per barrel for 2014 (year-to-date (or YTD), the spread has averaged ~$8 per barrel). For 2015, the EIA forecasts average prices for WTI and Brent crude to be $95.17 per barrel and $104.92 per barrel, respectively. This results in a forecast average spread of ~$10 per barrel for 2015.
Investors may want to monitor the spread because a narrower spread might make domestic producers more attractive relative to international producers. The difference between Brent and WTI has caused domestic producers, such as the companies previously mentioned, to realize lower prices on oil compared to international producers. The Energy Select Sector SPDR (XLE) is heavily weighted towards energy names with significant international exposure such as XOM and CVX.
To learn more about WTI crude oil prices, continue reading the next sections in this series.