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Crude Oil’s Glut: Oil-Weighted Stocks Could Bear the Brunt

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Nov. 20 2020, Updated 11:17 a.m. ET

US crude oil

On April 3, 2017, WTI (West Texas Intermediate) crude oil (USO) (OIIL) (USL) (DBO) May futures closed at $50.24 per barrel, which was ~0.7% lower than the previous closing price. Oil fell as normalcy returned to Libya’s production. Previously, supply disruption reduced Libya’s oil production by ~0.25 MMbpd (million barrels per day) and contributed to WTI crude oil’s break above $50.

In the trailing week, the Energy Select Sector SPDR ETF (XLE) rose 2.3%, while the S&P 500 Index (SPY) (IVV) (VNN) (SPX-INDEX) rose 0.7%. Energy accounts for 6.6% of the S&P 500 Index. Crude oil can impact broader markets. The S&P 400 Midcap 400 Index (IVOO) (MID-INDEX), which has 3.4% exposure to the energy sector, rose ~1% during this period. Energy accounts for 6.4% of the Dow Jones Industrial Average Index (DIA) (DJIA-INDEX). It rose 0.5% between March 27 and April 3. Other major world indexes such as the FTSE 100 Index (UKX-INDEX) (EWU) fell 0.1%, while the CAC 40 Index (PX1-INDEX) (EWQ) rose 1.4% during this period. Oil and gas companies account for 14.1% of the FTSE 100 Index and 11.6% of the CAC 40 Index. Crude oil is also an important driver of energy ETFs.

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According to an EIA (U.S. Energy Information Administration) report on April 3, 2017, US onshore oil producers raised their capital expenditure by $4.9 billion, or approximately by 72%, in 4Q16—compared to 4Q15­. It was the highest YoY (year-over-Year) change since 2012. The figure was calculated from 44 oil companies’ financial statements.

Since OPEC’s production cut deal in November 2016, US oil production has risen by ~0.5 MMbpd. It accounts for 42% of OPEC’s pledged production cuts, according to the EIA’s weekly production data. These bearish drivers could make crude oil’s current supply glut situation worse. It would keep downward pressure on crude oil.

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 upstream companies’ correlations with crude oil. These companies 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 oil-weighted companies that had the highest correlations with WTI crude oil from March 3, 2017, to April 3, 2017.

The oil-weighted stocks in XOP that had the lowest correlations with crude oil during the period were as follows:

  • Carrizo Oil & Gas (CRZO) – 55.5%
  • Kosmos Energy (KOS) – 40.7%

If you’re bearish on crude oil, you might want to avoid stocks that currently 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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