What’s the Correlation between Refining Stocks and Oil Prices?



Correlation coefficient

So far in this series, we’ve analyzed the stock price movements, dividend yields, short interests, implied volatilities, institutional ownership, analysts’ ratings, and valuations of four top American refiners: Marathon Petroleum (MPC), Valero Energy (VLO), Tesoro (TSO), and Phillips 66 (PSX). In this article, we’ll examine the correlations of these refining stocks with 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 a -1 to 0 shows an inverse correlation. We’ve considered 12 months’ worth of price history for the refining stocks under review and WTI (West Texas Intermediate) crude oil.

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Refining stocks and oil prices

The correlation coefficient of Phillips 66 (PSX) and WTI stands the highest among the refiners under review at 0.45. This value shows that PSX and WTI have a positive correlation and that around 45% of the movements in PSX’s stock price can be explained by changes in oil prices.

Downstream players Marathon Petroleum, Tesoro, and Valero Energy show lower correlations of 0.33, 0.26, and 0.17, respectively, with WTI.

Integrated energy companies’ correlations with crude oil tend to be higher than downstream companies’ correlations. A case in point is Statoil (STO), an integrated energy giant with a 0.73 correlation with WTI. 

Integrated energy companies have upstream operations as well as downstream activities. An upstream segment’s earnings are directly affected by crude oil prices. In fact, in a higher oil price scenario, upstream earnings constitute a major portion of integrated energy companies’ earnings.

The iShares Global Energy ETF (IXC) has ~5% exposure to the refining sector. Move on to the next article for a fundamental cross-sectional analysis of refining stocks, starting with a return on equity comparison.


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