Are Oil-Weighted Stocks Outperforming Oil due to Tax Overhaul?


Nov. 20 2020, Updated 4:46 p.m. ET

Tax reforms

Between December 13 and December 20, 2017, on average, our list of oil-weighted stocks rose 4.4%. US crude oil February futures underperformed our list of oil-weighted stocks by 1.7 percentage points over this time period. We already discussed the positive impact of the tax reforms on these oil-weighted stocks in the previous part. Oil-weighted stocks that rose the most between these two dates are:

  • Denbury Resources (DNR) at 10.6%
  • Whiting Petroleum (WLL) at 8.1%
  • Carrizo Oil & Gas (CRZO) at 6.4%

DNR had a correlation of less than 5%, while both CRZO and WLL had negative correlations with US crude oil February futures over this time period. So, these oil-weighted stocks moved independently of crude oil even though the returns were in the same direction.

In fact, on December 18, both CRZO and WLL gained more than 4% as the S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA) achieved record closes. The tax overhaul has been behind the bullishness in the broader markets, as tax cuts could have a positive impact on company profitability.

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On the same day, US crude oil prices fell 0.2%. So, apart from the correlations with oil prices, sentiments in the broader markets could be the key for these oil-weighted stocks. For this analysis, we have taken these oil-weighted stocks from the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and they have a minimum production mix of 60.0% in oil.

Oil-weighted stocks that underperformed in the trailing week are:

OAS had a negative correlation of 34.6% with US crude oil futures over this time period.

Multiyear low

Between February 11, 2016, and December 20, 2017, US crude oil active futures saw a gain of 121.6%. US crude oil fell to a 12-year low on this date.

The ProShares Ultra Bloomberg Crude Oil ETF (UCO), the United States Oil ETF (USO), and the United States 12-Month Oil ETF (USL) rose 68.4%, 45.3%, and 42.6%, respectively, between these dates. These ETFs invest in US crude oil futures. The list of oil-weighted stocks we’ve been discussing so far rose 73.4% from the US crude oil’s multiyear low.

The top outperformers in this period are:

  • California Resources (CRC) at 177.5%
  • Continental Resources (CLR) at 164.4%
  • Murphy Oil (MUR) at 99.2%

The top underperformers in this period are:

  • Occidental Petroleum (OXY) at 18.9%
  • Hess Corporation (HES) at 17.7%
  • Carrizo Oil & Gas at -9.7%

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