A Correlation Analysis of Shell and WTI

Maitali Ramkumar - Author

Aug. 18 2020, Updated 6:35 a.m. ET

What is a correlation coefficient?

In this series, we’ve analyzed Royal Dutch Shell’s (RDS.A) Denmark downstream asset sale, stock performance, analyst ratings, business segments, leverage, cash flows, and valuations. In this article, we’ll test the correlation between Shell’s stock price and crude oil’s price.

A 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’ worth of price history for Shell and WTI (West Texas Intermediate).

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Shell and crude oil

Integrated energy companies such as Shell are affected by volatility in crude oil prices, though to what degree varies from company to company. Shell’s correlation coefficient with WTI stands at 0.65, showing a strong positive correlation. It means that on average, 65% of the movements in Shell’s stock price can be explained by changes in WTI’s price.

The strength of this correlation is lower for Shell’s peer ExxonMobil (XOM). XOM’s correlation with WTI stands at 0.55. Integrated energy players Statoil (STO) and Suncor Energy (SU) show higher correlations with WTI at 0.73 and 0.71, respectively.

On the other hand, standalone downstream companies show feeble correlations with crude oil’s price. A case in point is Valero Energy (VLO), a refiner with a 0.21 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 ~75% exposure to the oil and gas exploration sector, ~21% exposure to the refining sector, and ~4% exposure to the oil and gas storage and transportation sector.


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