The Correlation between Integrated Energy Stocks and Oil Prices



What is the correlation coefficient?

So far in this series, we’ve performed a cross-sectional analysis of four integrated energy companies—ExxonMobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP). We’ve looked at shareholder returns, forward valuations, beta, and institutional holdings. We’ve also examined short interest and analyst recommendations for these companies. 

In this part, we’ll examine the correlation between these integrated energy stocks and oil prices.

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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 a 12-month price history of integrated energy stocks and WTI (West Texas Intermediate) crude oil.

Integrated energy stocks and oil prices

Integrated energy companies are affected by the volatility in crude oil prices. The degree of this volatility varies from company to company. Royal Dutch Shell’s (RDS.A) correlation coefficient versus WTI crude stands at 0.65, which is higher than ExxonMobil and Chevron. This shows a strong positive correlation. It also means that on an average, 65% of the movement in Shell’s stock price can be explained by changes in WTI prices.

However, the strength of the correlation is lower for ExxonMobil (XOM). The correlation of XOM versus WTI stands at 0.56. However, Chevron and BP show a higher correlation with WTI. Their correlation coefficients stand at 0.61 and 0.65, respectively.

On the other hand, standalone downstream companies show weak correlation with crude oil prices. A case in point is Valero Energy (VLO), a refiner that has a 0.21 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). This 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.

Move onto the next part for the fundamental cross-sectional analysis of integrated energy stocks, starting with leverage position.


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