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Correlation with Energy Commodities: How It Impacts Energy Stocks

PART:
1 2 3 4 5
Part 4
Correlation with Energy Commodities: How It Impacts Energy Stocks PART 4 OF 5

Does Crude Oil Matter to Natural Gas–Weighted Stocks?

Correlations with US crude oil

Southwestern Energy (SWN) had the highest correlation of 81.0% with US crude oil (OIIL) (USL) active futures between July 3 and July 10, 2017. Notably, SWN also had the highest correlation with natural gas active futures in the week ended July 10, 2017.

Does Crude Oil Matter to Natural Gas–Weighted Stocks?

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Based on correlations, natural gas–weighted stocks that tracked crude oil prices closely between July 3 and July 10, 2017, were as follows:

  • Antero Resources (AR): 74.2%
  • Chesapeake Energy (CHK): 74.0%
  • Range Resources (RRC): 70.8%
  • Gulfport Energy (GPOR): 49.2%

Interestingly, the top five natural gas–weighted stocks that had the highest correlations with crude oil are the top five stocks most correlated with natural gas in the trailing five-day trading session to July 10. We looked at these correlations with natural gas in the previous part of this series.

We can explain this to a great extent by the fact that natural gas itself had a correlation of 92.6% with crude oil between July 3 and July 10, 2017.

Cabot Oil & Gas (COG) and Rice Energy (RICE) had correlations of -2.8% and -36.5%, respectively, with US crude oil active futures in the trailing week that ended July 10, 2017. Again, these two stocks had the least correlation with natural gas active futures over the same time period.

Why crude oil could drive natural gas–weighted stocks

Crude oil is an important driver of energy stocks in general. The high correlations of natural gas–weighted stocks with crude oil support this further. Apart from the correlations we’ve looked at in this part of the series, fundamentally, crude oil prices could also impact natural gas prices. But in the long term, natural gas could finally have a stronger impact on these natural gas–weighted stocks because natural gas prices will drive their profits in the long term.

In the next part, we’ll analyze the returns of natural gas–weighted stocks and try to understand the role of their correlations with crude oil and natural gas in these returns.

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