Oil Price Correlations

The oil price is ticking up after the OPEC+ (OPEC plus Russia) meeting in early December, which saw Saudi Arabia push for the deepest production cuts in a decade. Oil up 2%. OPEC pumps 40% of the World’s oil. They increased production cuts by 500,000 barrels to 1.7m barrels a day – 372,000bpd by OPEC and 131,000bpd by non-OPEC. The Saudis say they are not trying to push prices higher but expect to underwrite prices in a period of seasonal weakness. Newswires suggest it will underpin the price at $60 and if the world economy behaves we could see $65-$70. Next OPEC meeting in March. Net result, the oil price is likely to behave itself for a while. The biggest swing factor in the short term of course is of course the trade talks. If they go wrong we start to worry about global recession again and the oil price falls. If trade talks progress, buy oil stocks. December 15, the date on which Trump will decide to press ahead with tariffs on another $158bn of Chinese goods or not, is pivotal for the short term direction of the oil price. There are a host of stocks that are tied to the oil price, the most obvious large one is WPL – here is a chart of the correlation of WPL to the oil price. Here are the numbers on the other large energy sector stocks: Worley (WOR) has also proven to be one of the best oil price proxy trading stocks. It has a very tight correlation with the oil price. These correlations tell you that you can do as much research on stocks like WOR and WPL as you like, but unless you get the oil price right it is pointless. It also tells you that if you can get the oil price right, these leveraged proxies move significantly more than the oil price. If you want to trade the oil price, trade the stocks. December 15 could be the trigger. I won't bother putting up the STOCK BOX for WOR or WPL...because they don't really matter. The correlations are too close, their fortunes are tied to the oil price as are their share prices. Who cares what the return on equity is. Want to hear more from Marcus? Read his article on why growth beats income