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Shell and WTI: A Correlation Analysis

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Jan. 10 2017, Updated 10:36 a.m. ET

What is a correlation coefficient?

In this series, we’ve analyzed Royal Dutch Shell’s (RDS.A) stock performance, analyst ratings, short interest, institutional holdings, implied volatility, and valuations. In this article, we’ll test the correlation between Shell’s 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 states no correlation, and -1 to 0 shows an inverse correlation. For our purposes, we’ve considered the past 12 months’ worth of price history for Shell and WTI (West Texas Intermediate).

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Shell and WTI

Integrated energy companies such as Shell are affected by volatility in crude oil prices. To what degree they’re affected varies from company to company. Shell’s correlation coefficient with WTI stands at 0.66, reflecting a strong positive correlation. It also means that on average, 66% of 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 0.56. Other integrated energy players Statoil (STO) and Suncor Energy (SU) show higher correlations with WTI at 0.74 and 0.73, respectively.

Standalone downstream companies show feeble correlations with crude oil’s price. A case in point is Valero Energy (VLO), a refiner with a 0.14 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 ~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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