Chevron and WTI: A Correlation Analysis



What is a correlation coefficient?

So far in this series, we’ve analyzed Chevron’s (CVX) 2017 capital expenditure guidance, stock movements, dividend yield, short interest, implied volatility, institutional holdings, and valuations. In this article, we’ll test the correlation between CVX’s stock 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 Chevron and WTI (West Texas Intermediate).

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Chevron and WTI

Integrated energy companies such as Chevron are affected by volatility in crude oil prices. To what degree they’re affected varies from company to company. Chevron’s correlation coefficient with WTI stands at 0.61, showing a strong positive correlation. It also means that on average, 61% of the movements in Chevron’s stock price can be explained by changes in WTI’s price.

The strength of the correlation is lower for Chevron’s peer ExxonMobil (XOM). XOM’s correlation WTI stands at 0.56. However, Statoil (STO) and Suncor Energy (SU) have higher correlations with WTI at 0.74 and 0.72, respectively.

On the other hand, downstream companies show weak correlations with crude oil’s price. A case in point is Valero Energy (VLO), a refiner with a 0.15 correlation with WTI.

Chevron and natural gas

Chevron’s correlation with natural gas is weak, standing at 0.13. This weakness could be due to Chevron’s production mix, which constitutes 34% natural gas and 66% liquids. We’ll discuss further production details later in this series.

If you’re looking for exposure to long-term growth and a broad-based exposure to the US market, you can consider the iShares Core S&P Total U.S. Stock Market ETF (ITOT). The ETF has ~7% exposure to the energy sector.


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