What is the correlation coefficient?
In this series, we have evaluated Phillips 66’s (PSX) stock movements, analyst ratings, dividend yield, and valuations. We’ve also looked at its PEG ratio, beta, short interest, institutional holdings, and implied volatility. In this part, we’ll test the correlation between PSX’s stock price and crude 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 -1 to 0 shows an inverse correlation. We have considered the past 12 months’ price history of PSX and WTI (West Texas Intermediate).
Correlation of Phillips 66’s stock with WTI
The correlation coefficient of Phillips 66 (PSX) versus WTI stands at 0.40. The correlation value for Phillips 66 and oil prices show that Phillips 66’s stock price moves in line with WTI’s price to a certain extent. This means that around 40% of the movement in Phillips 66’s stock price can be explained by changes in oil prices.
Phillips 66’s peer correlation analysis
However, the situation is a bit different for PSX’s peer Valero Energy (VLO). The correlation of VLO versus WTI stands at 0.07. Among the other downstream players, PBF Energy (PBF) and Tesoro (TSO) show lower correlations of 0.18 and 0.24, respectively.
In analyzing an integrated energy company, we can see that the correlation to oil prices is higher than with a downstream company. A case in point is Suncor Energy (SU), an integrated energy giant that has a 0.65 correlation with WTI.
For exposure to refining and marketing sector stocks, you can consider the Vanguard Energy ETF (VDE), which has ~8% exposure to these stocks.