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Correlation Analysis: Chevron and WTI

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What is the correlation coefficient?

In this series, we have analyzed Chevron’s (CVX) stock movements, business segments, leverage, cash flows, and valuations. In this part, we’ll test the correlation between Chevron’s stock and crude oil prices.

The 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 have considered past the 12 months’ price history of Chevron and WTI (West Texas Intermediate).

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Chevron and WTI

Integrated energy companies like Chevron (CVX) are affected by the volatility in crude oil prices. To what degree? This varies from company to company.

Chevron’s correlation coefficient versus WTI stands at 0.63, showing a strong positive correlation. It also means that on an average, 63% of the movement in Chevron’s stock price can be explained by changes in WTI prices.

However, the strength of the correlation is lower for Chevron’s peer ExxonMobil (XOM). The correlation of XOM versus WTI stands at 0.55. However, Statoil (STO) and Suncor Energy (SU) show a higher correlation with WTI at 0.74 and 0.71, respectively.

On the other hand, downstream companies show weak correlation with crude oil prices. A case in point is Valero Energy (VLO), a refiner that has a 0.20 correlation with WTI.

If you are looking for exposure to the overall energy sector, you can consider the iShares US 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.

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