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Why improvements in Iraq and Libya decreased crude prices

Avik Chowdhury

US energy prices fall as inventories rise and supply fears recede (Part 3 of 5)

(Continued from Part 2)

Improvements in Iraq and Libya decreased crude prices

On July 11, the price of the West Texas Intermediate (or WTI) crude front month contract closed at $100.83 per barrel—down sharply from the prior week’s close of $104.06 per barrel. Investors may note that despite the crude inventory decline exceeding market expectation of a fall in inventory level, oil still went down. WTI crude oil prices moved lower during the week on positive developments in Libya, easing of supply fears in Iraq, higher than estimated build in gasoline inventories, and a crude oil inventory build-up in Cushing.

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.

The previous graph shows WTI crude oil price movements compared to a few major energy exchange-traded funds (or 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 lower last week, which was a mildly bearish signal for oil producers because lower prices mean lower revenues. However, the longer-term elevated and stable action of oil prices have been a positive indicator for many major energy companies, such as XOM and SLB, and energy ETFs such as XLE, XOP, and OIH.

 

Continue to Part 4

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