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Correlation Analysis: Tesoro and Oil Prices

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What is correlation coefficient?

In this series, we’ve looked at Tesoro’s (TSO) stock movements, business segments, leverage, cash flows, and valuations. In this concluding part, we’ll test the correlation between TSO’s stock performance and crude oil prices.

Correlation coefficient shows the relationship between two variables. A correlation coefficient value of 0 to 1 shows a positive correlation. Zero states no correlation, and -1 to 0 shows an inverse correlation. We’ve considered the past 12-month price history of TSO and WTI (West Texas Intermediate).

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Tesoro and oil prices

The correlation coefficient of Tesoro (TSO) and WTI stands at 0.21. The correlation value for Tesoro (TSO) and the price of oil shows that Tesoro stock prices move in line with WTI prices to a certain extent. This means that around 21% of the movement in the price of Tesoro stock can be explained by changes in the price of oil.

Correlation analysis for Tesoro’s peers

The situation remains the same for TSO’s peer Valero Energy (VLO). The correlation of VLO versus WTI stands at 0.19. Other downstream players such as Marathon Petroleum (MPC) and Phillips 66 (PSX) have an even sharper correlation of 0.29 and 0.45 to WTI, respectively.

But while analyzing an integrated energy company, it’s worth noting that the correlation to oil prices is higher than a downstream company. A case in point is Statoil (STO), an integrated energy giant that has a 0.73 correlation with WTI.

If you’re looking for exposure to refining sector stocks, you can consider the iShares North American Natural Resources ETF (IGE). The ETF has ~7% exposure to refining and marketing sector stocks.

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