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Brent crude had strong rally on the back of inventories, US economy

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  • Brent crude prices closed at $104.56/barrel on June 7th, up from $100.39/barrel on May 31st, resulting in a positive for oil producers last week.
  • Oil prices were supported by a larger than expected decrease in U.S. crude inventories and positive U.S. employment data.
  • Prices had moved largely downward since mid-February when they touched ~$119/barrel, reaching lows of ~$98/barrel in mid-April. Since then, Brent has been roughly range-bound in the $100 to $105/barrel area.

Brent crude is viewed as the benchmark crude for international oil prices. Therefore, movements in Brent oil prices are a major driver in the valuation of international 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, Brent crude prices are an important indicator to watch for those owning international energy stocks.

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Last week, Brent crude prices finished up, closing at $104.56/barrel compared to $100.39/barrel the Friday before. Since mid-February, when Brent touched nearly $119/barrel, prices fell dramatically to touch below $98/barrel in mid-April. In the past few weeks, Brent has been roughly range-bound in the $100-105 per barrel area. However, in this past week the oil markets generally moved upwards in response to a larger than expected decrease in U.S. crude inventories (see here for more) and higher than expected increase in non-farm payrolls (see here for more).

Note that Brent crude does not properly reflect the price that producers within the U.S. receive. For domestic producers, WTI is a more appropriate benchmark (read about last week’s movement in WTI prices here), mainly due to a recent surge in domestic crude production, which has struggled to find sufficient transportation and outlets to bring WTI prices in line with Brent prices. 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. Also, Brent represents a certain grade of crude, and differences in the qualities of oil can affect the price that producers receive. Nevertheless, most market participants view Brent as the international oil benchmark, and price movements in Brent affect international energy stocks, such as Exxon Mobil (XOM), Chevron Corp. (CVX), ConocoPhillips (COP), and Anadarko Petroleum Corp. (APC).

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The top graph shows historical Brent crude oil prices. For most of this past year, Brent crude had been range-bound between ~$110/barrel to ~$120/barrel. However, oil broke the bottom of this range in early April given concerns over worse expectations of global economic growth and a consequently bearish outlook on oil demand.

As previously mentioned, higher crude prices generally have a positive effect on stocks in the energy sector. The below graph shows Brent crude oil price movements compared to XLE and XOM on a percentage change basis from January 2007 onward. One can see that crude oil, the XLE ETF, and XOM 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, the upward movement in prices this past week was a short-term positive for the sector. However, the medium-term bear market for Brent crude oil since early February has also been generally negative. Investors with energy holdings in names with international exposure, such as XOM, CVX, COP, and APC as well as the XLE (Energy Select Sector SPDR) ETF, may find it prudent to track the movements of benchmarks such as Brent crude.

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