What is a correlation coefficient?
In this series, we have analyzed Valero Energy’s (VLO) stock performance, analyst ratings, dividend yield, beta, short interest, institutional holdings, implied volatility, and valuations. In this part, we’ll examine the correlation between Valero’s stock and oil prices.
The correlation coefficient shows the relationship between two variables. A correlation coefficient value of zero to one shows a positive correlation, zero states no correlation, and a negative one to zero shows an inverse correlation. We’ll consider the 12-month price history of VLO and WTI (West Texas Intermediate) crude oil.
Valero’s stock and WTI
The correlation coefficient of Valero (VLO) and WTI stands at 0.15. The correlation value for Valero’s stock and oil price show that they have a positive but feeble correlation. The stock of Valero moves in line with WTI prices only to a certain extent. This means that around 15% of the movement in Valero’s stock price can be explained by changes in oil price.
Peer correlation analysis
The situation remains the same for VLO’s peer PBF Energy (PBF). The correlation of PBF versus WTI stands at 0.22. HollyFrontier (HFC), Tesoro (TSO), and Delek US Holdings (DK) show slightly higher correlations to WTI of 0.29, 0.27, and 0.36, respectively.
Integrated energy companies have higher correlations to oil prices than downstream companies. A case in point is Suncor Energy (SU), an integrated energy giant that has a 0.72 correlation with WTI. The high correlation is because integrated energy companies have upstream operations along with downstream activities. Upstream segments’ earnings are directly impacted by crude oil prices. In fact, in a higher oil price scenario, upstream earnings constitute a major portion of integrated energy companies’ earnings.
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