How Connected Are Oil Majors To The Price Of Oil?

May 24, 2010

Just how sensitive are the oil majors to crude prices? The answer might surprise you.

 

 

 

I've written previously about the problems with using ETFs as an oil proxy. We don't need to get into all of that again, but the primary takeaway is that even though most energy ETFs are composed exclusively of oil derivatives, the funds themselves track the price of their benchmark poorly, especially when said benchmark is in contango.

No, I've always been an advocate of a more direct energy play: specifically, using futures contracts to invest in the energy markets. Of course, this has its own problems, particularly the inability to make long-term plays, due to futures contracts' expirations.

So what's a would-be energy maven to do? If the ETFs don't track the derivatives properly, and the derivatives don't allow you to invest the way you want anyway, what option do you have?

Enter the oil companies.

Oil companies, obviously, depend upon the price of oil to remain profitable. Intuitively, when oil goes up, so too should oil companies' stock.

Realistically, however, you can't expect the current price of a barrel of oil to be entirely responsible for today's value of an oil company's share price, as there's obviously a bit of a lag, and these companies have other facets to their business. So, more accurately, a share price reflects that company's ability to make a profit from oil, rather than simply to follow oil prices up and down. If you want to make a play purely in oil, an oil company may not be for you.

However, if you want to make a more nuanced long-term bet on the oil industry in general, while concurrently investing in oil itself, one of the oil majors could work ... but which one?

To answer this question, I've done a statistical regression comparing the continuous front-month prices of crude oil over the last four years with the stock prices of the six oil-majors: BP (NYSE: BP), Exxon Mobile (NYSE: XOM), Total SA (NYSE: TOT), Royal Dutch Shell (Nasdaq: RDSA), ConocoPhillips (NYSE: COP) and Chevron (NYSE: CVX). Let's see how they stack up.

First, take a look at this chart comparing all six companies with continuous front-month crude oil futures (marked by CL):

 

 

Crude Prices & Oil Majors vs. Time

 

 

The most important thing to notice is that even though the charts are moving more or less together, it's not that tight a correlation. I don't need to break out the logarithmic chart to show you that the movements aren't exactly coupled at the hip.

That said, the prices still do ebb and flow together. Now, let's compare the prices one by one to see just how strong the relationship is.

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