What is a correlation coefficient?
In this series, we have analyzed HollyFrontier’s (HFC) stock movements, refining margin, leverage, cash flows, and valuations. In this concluding part, we will examine the correlation between crude oil, the broad market, and HFC’s stock price.
The correlation coefficient shows the relationship between two variables. A correlation coefficient value of zero to one shows a positive correlation, zero states no correlation, and a -1 to zero shows an inverse correlation. We have considered the 12-month price history of HFC, WTI (West Texas Intermediate), and the SPDR S&P 500 ETF (SPY).
HFC’s stock and WTI and SPY
The correlation coefficient of HollyFrontier (HFC) and WTI stands at 0.25. The correlation values for HollyFrontier and oil prices indicate that the past one-year stock prices of HFC have moved in line with crude oil prices to a certain extent.
On the other hand, the correlation between the broad market SPDR S&P 500 ETF (SPY) and HollyFrontier is high. The correlation coefficient of HFC and SPY stand at 0.55, which means around 55% of the movement in HollyFrontier’s price can be explained by changes in the SPY.
The strong correlation is due to the fact that SPY is an indicator of the broader economy. So, when an economy grows, the refining sector grows as well. This is because when economic health improves, the demand for fuels increases, leading to higher prices and volumes of refined products.
HollyFrontier’s peers, Western Refining (WNR), Delek US Holdings (DK), and PBF Energy (PBF) also show a stronger correlation to SPY. If you’re looking for exposure to refining sector stocks, you can consider the iShares US Oil & Gas Exploration & Production ETF (IEO). The ETF has an exposure of ~27% to the sector.