Oil Prices Rise as Energy Stocks Dip in Pre-Bell Trading
Oil prices rose modestly on Thursday morning, but energy stocks slipped in premarket trading. Front-month West Texas Intermediate (WTI) crude oil increased by 0.5% to $82.63 a barrel, while US natural gas futures gained 1.2% to $2.88 per 1 million British thermal units.
This unexpected divergence occurred despite Enbridge and KKR announcing a C$2.7 billion joint venture to expand a major Canadian natural gas pipeline system. The Energy Select Sector SPDR Fund (XLE), which holds energy companies rather than barrels of oil, fell 0.3% pre-bell.
The discrepancy between oil prices and energy stocks can be attributed to the difference in timeframes that these assets are valued on. Commodity funds like the United States Oil Fund (USO) and United States Natural Gas Fund (UNG) track near-dated futures, which can respond quickly to changes in spot prices.
On the other hand, energy stocks are valued based on multi-year cash flows and the discount rate investors apply to those cash flows. The Enbridge-KKR deal is a long-lead infrastructure bet that typically moves share prices more on changing volume expectations and regulatory risk than on modest swings in spot prices.