Brent versus WTI
When 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, as WTI is the U.S. benchmark and Brent is the international benchmark. For example, see the following data for a comparison of oil prices for U.S.-concentrated companies versus companies with a global production profile.
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 (XOM) $99.82
Chevron Corporation (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 June 10, 2014, forecast that the average 2014 prices for WTI and Brent would be $98.67 per barrel and $107.82 per barrel, respectively. This results in an average spread of $9.15 per barrel for 2014 (year-to-date, the spread has averaged ~$8.00 per barrel). For 2015, the EIA forecasts average prices for WTI and Brent crude to be $90.92 per barrel and $101.92 per barrel, respectively. This results in a forecast average spread of $11 per barrel for 2015.
Investors may want to monitor the spread, as a wider spread might make international producers more attractive relative to domestic producers. The difference between Brent and WTI has caused domestic producers, such as those mentioned above (CHK, CXO, RRC, and OAS), to realize lower prices on oil compared to international producers. Also note that large international producers such as XOM and CVX have heavier weightings in cap-weighted energy ETFs such as the SPDR Energy Select Sector ETF (XLE) than equal-weighted ETFs such as the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
For more on WTI crude oil prices, continue to the next part of this series.