What is a correlation coefficient?
In this series, we have analyzed Valero Energy’s (VLO) stock performance and analyst ratings for Valero. We also examined Valero’s dividend yield, beta position, the reasons for short interest shifts, changes in institutional holdings, implied volatility movements, and valuations. Now, we’ll examine the correlation between Valero’s stock and oil prices.
A correlation coefficient shows the association between two variables. A positive correlation occurs when the correlation coefficient values lie between zero to one. A negative correlation occurs between negative one and zero, and zero signifies no correlation. We have considered the 12-month price history of VLO and WTI (West Texas Intermediate) crude oil.
VLO and WTI
The correlation coefficient between VLO and WTI stands at 0.08. The correlation value between Valero stock and WTI reveals that they have a positive but weak correlation. Valero stock changes in line with WTI prices only to a certain extent. This means that around 8% of the variations in VLO can be measured by changes in WTI.
Peers’ correlation values
The scenario is similar for VLO’s peer PBF Energy (PBF). The correlation of PBF versus WTI stands at 0.17. Marathon Petroleum (MPC), Phillips 66 (PSX), and Delek US Holdings (DK) show slightly higher correlations of 0.34, 0.40, and 0.37 to WTI, respectively.
Integrated energy companies tend to have higher correlations to oil prices than downstream companies do. Integrated energy majors like Suncor Energy (SU) have an average correlation of 0.65 with WTI. The high correlation is due to integrated energy companies’ upstream operations. In fact, in a rising oil price scenario, upstream earnings constitute a major piece of the pie.
If you are looking for exposure to refining sector stocks, you can consider the iShares North American Natural Resources ETF (IGE). The ETF has ~7% exposure to downstream sector stocks.