US crude oil

On February 27, 2017, WTI (West Texas Intermediate) crude oil (USO) (OIIL) (USL) (SCO) April futures closed at $54.05 per barrel, which is ~0.1% more than the previous closing price. US crude oil April futures rose 0.5% on a closing price basis in the week ending on February 27, 2017. In the trailing week, the Energy Select Sector SPDR ETF (XLE) fell 0.5% and the S&P 500 Index (SPY) (QQQ) (SPX-INDEX) rose 0.9%. Crude oil is an important driver for energy ETFs. It can also impact broader markets.

Oil’s Breakout: Which Oil-Weighted Stocks to Watch

Oil prices rose because of optimism surrounding OPEC’s deal. OPEC members reduced their oil output by 890.2 thousand barrels per in January 2017—compared to December 2016. The US oil rig count rose by five to 602 for the week ending on February 24, 2017. Rising rigs mean higher oil production, which could have a negative impact on crude oil prices.

On February 23, 2017, active oil futures traded at a discount of $0.56 to the futures contracts 12 months ahead—the lowest since November 16, 2014. The fall in the spread could point to tightening in the crude oil demand-supply balance and higher prices.

In this series

In this series, we’ll take a look at the correlations between crude oil–weighted stocks and crude oil. We’ll also look at the correlations between natural gas–weighted stocks and natural gas.

Oil-weighted stocks

First, let’s look at the correlations for upstream companies that are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and operate with production mixes of at least 60.0% in crude oil.

Below are the correlations of the top five oil-weighted companies that have the highest correlation with WTI crude oil from January 27, 2017, to February 27, 2017:

Oil-weighted stocks in XOP that had the lowest correlations with crude oil during this period were:

  • Kosmos Energy (KOS) – 35.2%
  • Callon Petroleum (CPE) – 34.2%

If you’re bullish on crude oil, particularly due to OPEC’s record compliance with pledged output cuts and the rise in US crude oil exports, you might want to include stocks that have high correlations with crude oil in order to realign your portfolio.

In the next part of this series, we’ll look at the returns of crude oil–weighted stocks compared to crude oil.

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