Correlation of gas-weighted stocks with crude oil
Crude oil is crucial for the energy sector. It can drive the sentiment and movements in natural gas stocks too, apart from affecting oil-heavy stocks.
Some natural gas–heavy stocks can be highly correlated to movements in crude oil (UCO)(USL). Below are the upstream stocks with the highest correlations with crude oil between May 15 and May 22, 2017. These companies operate with an at least 60% production mix in natural gas and are all part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
- Gulfport Energy (GPOR): 92%
- EQT (EQT): 85.8%
- Range Resources (RRC): 78.1%
- Cabot Oil & Gas (COG): 73.9%
- Chesapeake Energy (CHK): 70.7%
Even the least correlated natural gas-heavy stocks from XOP still have high correlations with crude oil. For example:
- Rice Energy (RICE): 64.1%
- WPX Energy (EQT): 61.7%
Comparing the correlation
Many of the natural gas–weighted stocks discussed above have a higher correlation with US crude oil compared to natural gas in the trailing week.
So, in the short-term, crude oil could drive natural gas weighted stocks. However, in the long-term, natural gas prices would still be the key driver for these stocks.
Investors must also understand the inherent relationship between natural gas and crude oil. Higher oil production could adversely impact the whole energy sector.
In the final part of this series, we’ll analyze the returns of natural gas-heavy stocks compared to that of natural gas.