uploads///Crude Oil Correlation Study

Why Crude Oil Prices Don’t Impact Crude Producers the Same



Highest and lowest short-term correlations

For the past month, Energen (EGN) had the highest correlation of ~0.94 with WTI (West Texas Intermediate) crude oil (USO) prices. Occidental Petroleum (OXY) had the lowest correction coefficient of approximately -0.12 with WTI crude oil prices. In the past month, Energen’s stock price rose by ~40%. OXY’s stock price only rose by ~2%. Crude oil rose by ~33% during the same period.

Article continues below advertisement

Why EGN had the highest correlation with crude oil prices

In the last five weeks, despite missing its 4Q15 earnings and revenue estimates, Energen’s stock price had a strong performance along with crude oil prices. This strong performance can be attributed to Energen’s unhedged 2016 production and its prudent decision on March 11, 2016, to hedge ~50% of the 2016 crude oil production at higher levels of ~$45 per barrel. In other words, if crude oil prices top here, Energen’s correlation on the way down might be of a lower degree because of its recent hedge program.

Occidental Petroleum’s low correlation with crude oil prices

Occidental Petroleum’s stock price stagnated in the past month despite an ~33% increase in crude oil. It’s important to note that in the last two months, its stock price already rose by ~16%. One possible reason for such a varying performance, or correlation with WTI crude, is that the stagnation in Occidental Petroleum’s stock price might be indicating the imminent short-term top in crude oil prices. Occidental Petroleum doesn’t have any hedges for its production. As a result, it depends on spot crude oil prices. Typically, at important turning points, producer stock prices lead the underlying commodity prices.

Article continues below advertisement

Why Diamondback Energy has the lowest correlation 

Based on the timeframe selected, Diamondback Energy (FANG) has shown bigger variations in the degree of correlations with crude oil. These variations are clearly evident in the values of ~0.85 and ~0.57 for a time period of one month and 12 months. The lower degree of correlation in the past year can be attributed to Diamondback Energy’s strong hedging positions in 2015.

Other upstream players

Other energy companies from the S&P 500 (SPY) like Murphy Oil (MUR), Cimarex Energy (XEC), Pioneer Natural Resources (PXD), Noble Energy (NBL), and EOG Resources (EOG) have three-month correlations with crude oil prices of ~0.89, ~0.83, ~0.80, ~0.89, and ~0.78, respectively.

In the next part, we’ll study how natural gas producers are correlated with natural gas prices.


More From Market Realist