What is the correlation coefficient?
In this series, we’ve analyzed BP’s (BP) stock performance, analyst ratings, dividend yield, PEG ratio, valuations, short interest, institutional holdings, and implied volatility. In this part, we’ll test the correlation between BP’s stock and crude oil, the broader market, and natural gas.
The correlation coefficient shows the relationship between two variables. A correlation coefficient value of 0 to 1 shows a positive correlation, 0 reflects no correlation, and -1 to 0 shows an inverse correlation.
We have considered the past 12 months’ price history of BP stock and WTI (West Texas Intermediate), the SPDR S&P 500 ETF (SPY), and Henry Hub natural gas prices.
BP’s Correlation with WTI, SPY, and Henry Hub Gas
Integrated energy companies like BP are affected by volatility in crude oil prices. But to what degree? That varies from company to company. BP’s correlation coefficient versus WTI stands at 0.58, which shows a strong positive correlation. This number also means that, on average, 58% of the movement in BP’s stock price can be explained by changes in WTI prices.
But the strength of the correlation with oil is lower for BP’s peer ExxonMobil (XOM). XOM’s correlation with WTI stands at 0.50. The other integrated energy player, Suncor Energy (SU), shows a higher correlation with WTI at 0.65. On the other hand, standalone downstream companies show a feeble correlation with crude oil prices. A case in point is Tesoro (TSO), a refiner that has a 0.25 correlation with WTI.
BP’s correlation to the broader market indicator, the SPDR S&P 500 ETF (SPY), is also high at 0.53 because the market is an indicator of the broad economy. When the economy grows, the energy industry also grows. However, BP’s stock correlation to natural gas is weak. Natural gas accounts for 46% of BP’s production mix.
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 ~75% exposure to the oil and gas exploration sector, ~21% exposure to the refining sector, and ~4% exposure to the oil and gas storage and transportation sector.