How Foreign Integrated Energy Stocks Correlate with Brent
What is a correlation coefficient?
In this series, we did a cross-sectional analysis of foreign integrated energy stocks for dividend yields, valuations, and beta positions. We also considered institutional holdings levels, short interest shifts, implied volatility changes, and analyst recommendations for Total (TOT), Suncor Energy (SU), ENI (E), and Petrobras (PBR). In this part, we’ll explore the correlation between these integrated energy stocks and crude oil prices.
Correlation coefficient depicts the association between two variables. Thus, a positive correlation has a coefficient value between zero and one, an inverse correlation has a value between negative one and zero, and no correlation has a value of zero. We have considered the 12-month price history of foreign integrated energy stocks and Brent crude oil.
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Foreign integrated energy stocks and Brent
Integrated energy companies are affected by volatility in crude oil prices. To what degree? This varies from company to company. Suncor Energy’s (SU) correlation coefficient versus Brent stands at 0.64, which is higher compared to TOT, E, and PBR. This shows a strong positive correlation. It also means that on average, 64% of the movement in Suncor’s stock price can be explained by changes in Brent prices. To know about the likely direction of crude oil prices, you can refer to Record Inventories at Cushing Could Pressure Crude Oil Prices.
However, the strength of the correlation is lower for ENI (E). The correlation of E versus Brent stands at 0.54. TOT and PBR show a higher correlation with Brent. Their correlation coefficients stand at 0.56 and 0.57, respectively. For exposure to integrated energy stocks, you can consider the iShares Global Energy ETF (IXC), which has ~55% exposure to the sector, including TOT, SU, E, and PBR.
On the other hand, standalone downstream companies show weak correlations with crude oil prices. Like Valero Energy (VLO), a downstream company has a 0.07 correlation with Brent.
For a cross-sectional analysis of American integrated energy stocks like ExxonMobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP), you can refer to The Integrated Energy Sector: Let’s Wrap It Up for 1Q17.