Refining Stocks and WTI: A Correlation Analysis


Dec. 4 2020, Updated 10:53 a.m. ET

What’s a correlation coefficient?

In this series, we’ve analyzed the stock price movements, dividend yields, short interests, implied volatilities, institutional ownership, analyst ratings, and valuations of the top four American refiners: Marathon Petroleum (MPC), Valero Energy (VLO), Tesoro (TSO), and Phillips 66 (PSX).

Now, let’s analyze the correlations between these refining stocks and oil prices.

A correlation coefficient shows the connection between two variables. A correlation coefficient value of 0 to 1 shows a positive correlation, 0 shows no correlation, and -1 to 0 shows an inverse correlation. 

We’ve considered the 12-month price histories of WTI (West Texas Intermediate) crude oil and the refining stocks under our review.

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Refining stocks and oil prices

PSX’s correlation coefficient with WTI is high at 0.40. This correlation shows that the two have a positive relationship, as changes in oil prices influence ~40% of the changes in PSX’s stock price. To learn more about the likely direction of crude oil prices, read Will US Crude Oil Stay above $50?

Marathon Petroleum, Tesoro, and Valero Energy have lower correlations of 0.34, 0.25, and 0.08 with WTI, respectively.

On analyzing an integrated energy company, we can see that its correlation with oil prices is higher than that of a downstream company. For example, integrated energy giant Royal Dutch Shell (RDS.A) has a 0.62 correlation with WTI. 

Integrated energy companies’ upstream earnings are directly affected by crude oil prices. In a soaring oil price scenario, upstream earnings rise and constitute a major portion of integrated energy companies’ earnings.

For exposure to refining stocks, you can consider the Vanguard Energy ETF (VDE). The ETF has ~8% exposure to the refining sector.


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