In this series, we’ve analyzed BP’s (BP) stock movements, business segments, leverage, cash flow, and valuations. In this article, we’ll test the correlation between BP’s stock and crude oil’s price.
The correlation coefficient shows the relationship between two variables. A correlation coefficient value of 0 to 1 shows a positive correlation, 0 shows no correlation, and -1 to 0 shows an inverse correlation. We’ve considered the past 12 months of price history for BP and WTI (West Texas Intermediate).
BP and WTI
Integrated energy companies such as BP are affected by volatility in crude oil prices. To what degree? This varies from company to company. BP’s correlation coefficient with WTI stands at 0.66, showing a strong positive correlation. It means that on average, 66% of the movements in BP’s stock price can be explained by changes in WTI’s price.
The strength of this correlation is lower for BP’s peer ExxonMobil (XOM). XOM’s correlation with WTI is 0.55. Statoil (STO) and Suncor Energy (SU) show higher correlations with WTI at 0.73 and 0.69, respectively.
On the other hand, standalone downstream companies show weak correlations with crude oil’s price. A case in point is Tesoro (TSO), a refiner with a 0.24 correlation with WTI.
If you’re looking for exposure to the overall energy sector, you can consider the iShares U.S. Oil & Gas Exploration & Production ETF (IEO). The ETF has ~76% exposure to the oil and gas exploration sector, ~21% exposure to the refining sector, and ~3% exposure to the oil and gas storage and transportation sector.