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Energy Stocks: Valuable Quantitative Insights for Investors

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Energy Stocks: Valuable Quantitative Insights for Investors PART 1 OF 4

OPEC Renews Supply Glut Fears: Crude Oil–Weighted Stocks React

Crude oil

On October 31, 2016, the WTI (West Texas Intermediate) crude oil (UWTI) (USO) (OIIL) (USL) (SCO) (DWTI) December contracts closed at $46.86 per barrel. The contracts were ~3.8% lower than the previous closing price. Oil prices fell due to growing doubts about the implementation of OPEC’s (Organization of the Petroleum Exporting Countries) deal to cut production.

OPEC Renews Supply Glut Fears: Crude Oil–Weighted Stocks React

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Price weakness set in after news that OPEC members failed to reach an agreement on individual production quotas in Vienna. Particularly, Iran and Iraq aren’t willing to reduce their oil output.

Non-OPEC countries indicated that OPEC should implement the deal within the cartel before asking other non-OPEC oil producers to join. If OPEC fails to achieve a consensus among its members, it won’t be able to deliver the blueprint of the production cut plan to its members by November 30. It renewed supply glut fears, which put pressure on crude oil prices.

In this series, we’ll take a look at the correlations between crude oil–weighted stocks and crude oil. We’ll also look at the correlations between natural gas–weighted stocks and natural gas.

Oil-weighted stocks

Let’s look at some of the upstream companies that are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and operate with a production mix of at least 60% in crude oil.

Below are the correlations of these oil-weighted companies with WTI crude oil from September 30 to October 31, 2016. Oil-weighted stocks that are correlated strongly with crude oil over the last month include:

  • Callon Petroleum (CPE) – 78.2%
  • Continental Resources (CLR) – 78.2%
  • Hess Corporation (HES) – 77.1%
  • Carrizo Oil & Gas (CRZO) – 76.2%
  • Kosmos Energy (KOS) – 75.1%
  • Denbury Resources (DNR) – 72.7%
  • California Resources (CRC) – 70.8%

Oil-weighted stocks in XOP that had the lowest correlation with crude oil include:

  • Synergy Resources (SYRG) – 49.1%
  • Murphy Oil Corporation (MUR) – 41.6%

Investors who are bullish on crude oil might use some of the stocks that have a high correlation with crude oil to realign their portfolios. In the next part of this series, we’ll look at the returns of crude oil–weighted stocks compared to crude oil.

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