Correlation Analysis: BP and Energy Prices


Jan. 15 2016, Updated 4:38 p.m. ET

What is a correlation coefficient?

In this series, we’ve analyzed BP’s (BP) stock movements, business segments, leverage, cash flows, and valuations. In this concluding part, we’ll test the correlation between BP’s stock performance, crude oil, and natural gas prices.

A correlation coefficient shows the relationship between two variables. A correlation coefficient value of 0 to 1 shows a positive correlation, 0 states no correlation, and -1 to 0 shows an inverse correlation. We’ve considered the past five years of price history for BP, Brent crude oil, WTI (West Texas Intermediate) crude oil, and Henry Hub natural gas.

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BP and energy prices

Integrated energy companies such as BP are affected by volatility in crude oil and natural gas prices. To what degree they are affected varies from company to company. BP’s correlation coefficients with WTI, Brent, and Henry Hub natural gas prices stand at 0.71, 0.62, and 0.58, respectively. These figures show strong positive correlations. They also indicate that, on average, 64% of movement in BP’s stock price movement can be explained by changes in crude oil and natural gas prices.

The strength of the correlations are lower for BP’s peer ExxonMobil (XOM). XOM’s correlation with Brent stands at 0.23. However, like BP, Royal Dutch Shell (RDS.A) shows a higher correlation with Brent at 0.70.

On the other hand, standalone downstream companies show strong inverse correlations with crude oil prices. A case in point is refining company Tesoro (TSO), which has a -0.85 correlation with Brent.

If you’re looking for exposure to the overall energy sector, you can consider the iShares US Oil & Gas Exploration & Production ETF (IEO). The ETF has ~67% exposure to the oil and gas exploration sector, ~30% exposure to the refining sector, and ~2.5% exposure to the oil and gas storage and transportation sector.


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