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  • Hedge Yourself Against Rising Oil Prices 28 comments
    Mar 6, 2011 5:55 AM | about stocks: KMP, APC, APA, XOM, CXO, OXY, COP, CVX, SLB, MRO, HES, NOV, CLR, HAL, DO, VLO, SE

    The political chaos in North Africa and Middle East caused Brent oil price to hit $110 a barrel for the first time since 2008. Libya is at the edge of a civil war; foreigners are trying to save their lives by running away from the country. It is not just Libya. Another large oil supplier, Iran witnessed thousands of protesters marching in Tehran demanding a change. Even in Saudi Arabia, the ministry of interior confirmed about protesters and threatened to crash them. The dictatorship regimes of the region are falling one-by-one. Tunus first, Egypt second. Who knows which one will be next? Obviously, there is a lot of uncertainty in that region which raised the oil prices above $100.
    The crude oil prices are up by $4.63 from a week earlier, and $21.04 higher than the last year. The future contracts imply that oil prices are expected to stay at least at the current level:

    Crude oil futures price

    Crude Oil Futures Price
    Naturally, changes in crude oil price is quickly reflected in the retail gasoline prices: Gasoline is now at a national average of $3.392 a gallon. Two years ago the national average retail price was $1.90

    Average National Retail Oil Prices  

    Average National Retail Oil Prices

    What can we do about rising gasoline prices? Automotive Experts suggest the following:

    • Check your air and oil filter.
    • Straighten up and align your tires properly.
    • Tune up the engine.
    • Pump up the tires.
    • Check the gas cap.
    • Drive slowly and smoothly (optimal speed is 55mph).
    • Lighten up your load.
    • Turnoff the engine when you are idle.

    Besides listening the automative experts, you can also follow T.Boone Pickens, and invest in energy stocks. While the increasing gasoline costs are not good for consumers, it benefits those who invest in energy stocks. The best hedge against retail oil prices is the energy stocks that have the highest correlation with them. Therefore, we decided to compute the Pearson Correlation coefficient between major oil related stocks and retail oil prices. This coefficient shows how two variables are related. A value close to 1 implies perfect positive correlation and a correlation coefficient close to 0 implies no relation at all. Since it is also of interest to see how correlation changes between intrasector classifications, therefore largest 3 companies are selected from each oil and gas category. When available up to last 19 years of data were used. 

    Here are the results:

    The 1st table shows the correlation coefficient for Independent Oil & Gas Companies  (Occidental (OXY), Apache (APA), Anadarko (APC)) and Major Integrated Companies (Exxon (XOM), Chevron (CVX), ConocoPhillips (COP)). Data on Chevron starts from October 2001.

    As we can see, the correlation between large oil and gas companies that have integrated operations are very high. Companies in these sectors provide almost perfect hedge against rising oil prices.

    OIL and GAS

             

     

    Retail Gas

    OXY

    APA

    APC

    XOM

    CVX

    COP

    Retail Gas

    1.000

    0.919

    0.955

    0.925

    0.894

    0.870

    0.941

    OXY

     

    1.000

    0.975

    0.938

    0.871

    0.926

    0.865

    APA

     

     

    1.000

    0.967

    0.918

    0.942

    0.923

    APC

     

     

     

    1.000

    0.922

    0.906

    0.913

    XOM

     

     

     

     

    1.000

    0.957

    0.942

    CVX

     

     

     

     

     

    1.000

    0.884

    COP

     

     

     

     

     

     

    1.000

    The 2nd table shows the correlation coefficient for Drilling Companies (Continental (CLR), Concho (CXO), Diamond (DO)) and Equipment Companies (Schlumberger Limited (SLB), Halliburton (HAL), National Oilwell Varco (NOV)). The results show that stock prices of oil related equipment companies are very much related to oil prices. The weak correlation of Continental and Concho may be attributed to the limited data: Data on Continental and Concho is available from 2007; Diamond Offshore data is available from 1995, and National Oilwell data is available from 1996.   

    DRILLING and EQUIPMENT

             

     

    Retail Gas

    CLR

    CXO

    DO

    SLB

    HAL

    NOV

    Retail Gas

    1.000

    0.510

    0.105

    0.864

    0.899

    0.835

    0.905

    CLR

     

    1.000

    0.728

    0.038

    0.258

    0.533

    0.417

    CXO

     

     

    1.000

    -0.448

    -0.003

    0.261

    0.116

    DO

     

     

     

    1.000

    0.949

    0.872

    0.916

    SLB

     

     

     

     

    1.000

    0.930

    0.964

    HAL

     

     

     

     

     

    1.000

    0.856

    NOV

     

     

     

     

     

     

    1.000

    The 3rd table shows the correlation coefficient for Pipeline Companies (Kinder Morgan (KMP), Williams (WMB), Spectra Energy (SE)) and Refining Companies (Marathon (MRO), Valero Energy (VLO), Hess (HES)). 
    There is almost a perfect correlation between refining company stocks and retail oil prices as we expected. What is interesting is the high correlation between retail gasoline prices and Kinder Morgan stocks. While Kinder Morgan is a large pipeline transportation and energy storage company that claims to "...operate like a giant toll road and receive a fee for our services, generally avoiding commodity price risk." pearson coefficient shows the opposite. The fundamental reason for this high correlation is about their customer base: Their customers include major oil companies, energy producers and shippers, local distribution companies and businesses across many industries. They are also the second largest oil producer in Texas. Therefore, it is quite natural to see such a high level of correlation.

    PIPELINE and REFINING

             

     

    Retail Gas

    KMP

    WMB

    SE

    MRO

    HES

    VLO

     

    Retail Gas

    1.000

    0.856

    0.229

    0.683

    0.897

    0.926

    0.784

     

    KMP

     

    1.000

    0.175

    0.338

    0.773

    0.770

    0.655

     

    WMB

     

     

    1.000

    0.855

    0.358

    0.296

    0.257

     

    SE

     

     

     

    1.000

    0.790

    0.519

    0.641

     

    MRO

     

     

     

     

    1.000

    0.887

    0.907

     

    HES

     

     

     

     

     

    1.000

    0.705

     

    VLO

     

     

     

     

     

     

    1.000

     

    Another interesting result about KMP is the low level of correlation between other pipeline companies. The correlation coefficient with Spectra and Williams co. are 0.338 and 0.175 respectively. We also checked KMP with other companies. KMP stock price is almost perfectly correlated with major oil & gas stocks such as Apache (0.907), Anadarko (0.903) and Exxon (0.894). Correlation with Concho was also high (0.888).



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: KMP, APC, APA, XOM, CXO, OXY, COP, CVX, SLB, MRO, HES, NOV, CLR, HAL, DO, VLO, SE
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Comments (28)
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  • dkcmz
    , contributor
    Comments (11) | Send Message
     
    I agree with ogulsev. Also according to economy news,decreasing of petroleum stocks in USA has effects on oil prices. According to data of USA Energy Information Administrating ,petroleum stocks decreased 400 thousands of barrel and became 346.4 millions of barrel.However,It was expected to increase 1.6 million of barrel.At the same time gasoline stocks decreased 3.6 million barrel and became 247million barrel .It was expected to increase 900 thousands of barrel.
    6 Mar 2011, 09:27 AM Reply Like
  • FromAppleCity
    , contributor
    Comments (8) | Send Message
     
    it is amazing how everything is interconnected; events in the Middle East countries bring about the prices of oil to rise and energy stocks to become more expensive. The upswing of oil prices influences customers and even drill companies :)
    6 Mar 2011, 09:48 AM Reply Like
  • zeynep şule
    , contributor
    Comments (11) | Send Message
     
    Nowadays, increasing of oil prices affects Turkey inflation and trade balance deficit in negative way because 93% of petroleum is imported in Turkey, so the problem in Libya causes the increase of oil prices all over the world and also in Turkey. Last year the oil price is $75 but today it is going up $110 in Turkey.
    6 Mar 2011, 10:33 AM Reply Like
  • dkcmz
    , contributor
    Comments (11) | Send Message
     
    We can not think the economy independently. It can be affected by political changes. Not only the events in our country but also events in other countries can affect our economy. Nowadays political chaos is one of the causes of increasing oil prices.
    6 Mar 2011, 10:47 AM Reply Like
  • Columnist
    , contributor
    Comments (11) | Send Message
     
    Oil is a finite resource and it’s getting harder and harder to find it. I think we’re coming to the end of cheap oil and that’s evident in the current price, which is sure to keep going up as time goes on.
    I consider an alternative energy to be the only long-term solution to the current oil crisis.
    By the way, we can talk as much as we want about the increase in price of oil. But, we should be able to focus on the solutions of how we can get rid of such a problem. If you share your ideas about how to cope with this issue, we can discuss more on it =)
    6 Mar 2011, 11:44 AM Reply Like
  • zeynep şule
    , contributor
    Comments (11) | Send Message
     
    dkcmz is right, and fromapplecity, we can make a connection between Libya and the world. Libya is the 17th petrol producer in the world. It is qualified and high standart oil, so European countries demand Libya's oil. There is a political chaos in Libya and it affects the other countries.
    6 Mar 2011, 12:06 PM Reply Like
  • Sanitychecker
    , contributor
    Comments (91) | Send Message
     
    Wow. I guess I am in the minority and disagree. Are all of the commentators above family members?

     

    Ogulsev,

     

    I have to apologize to you. You and I have disagreed in other forums about the level of correlation between Oil prices and Oil Pipeline and Transportation stocks. I offered that the correlation was low and you held that it is extremely high (as you also do in the article above).

     

    I ran a number of correlations between the daily stock price of KMP and the price of oil OK WTI spot prices. I used January 1, 1998 as a starting point since I haven't been able to find out the exact date KMP was founded in 1997 and didn't want to use inaccurate data. Further, to ensure data integrity, I reviewed each day to ensure that both were traded (since the markets are closed on different days) and eliminated any dates both were not traded. I am apologizing because, the correlation of prices between 1/1/1998 and 3/1/2011 show a correlation of .8359, which is quite high and much higher that I expected based on the correlation I ran last week covering a shorter time frame. So, although the data you used was flawed (running a correlation over 20 years for a company only in existence for 14 years), my analysis bears out that the correlation does increase over longer time periods.

     

    However, that is only part of the story. The correlation is very dependent on the amount of time used and the time frame selected:

     

    Correlation between Oil price (OK WTI spot price) and KMP stock price ending 3/1/2011:
    3 yrs .3842
    4 yrs .3548
    5 yrs .4279
    6 yrs .4801
    10 yrs .8330

     

    You have to run a correlation over a period exceeding 6 years before it exceeds 48%. As you can see, the analysis also validates my contention that Pipeline and Transportation companies are not always highly correlated to the price of oil.

     

    Working back in time; breaking the period (1/1/1998 to 3/1/2011) into 4 year segments you get very different results:

     

    3/07 to 3/11 .3548
    3/03 to 3/07 .6679
    3/99 to 3/03 .1332

     

    If you are trying to hedge gasoline prices, you may be more interested in a more relevant correlation experience (shorter time frame) and more recent so the data is fresh and current.

     

    Most Exploration and Production companies, whose fortunes rise and fall with the price of oil, don't hedge their production much beyond three years due to a lack of visibility and predictability. So I would argue that although you should be aware that, over extremely long periods, the price of oil has shown a high correlation to KMP, over both shorter periods and more recent periods (the period you would be investing in) the correlation has been significantly lower.

     

    KMP is a good company, paying a nice dividend in a very low interest rate environment. That may be a reason to choose to invest in it, however, there are much better choices to hedge gas prices at the pump.

     

    Disclosure: Long KMP, LINE, VNR, LGCY, ETP, ENP
    6 Mar 2011, 01:21 PM Reply Like
  • ali taş
    , contributor
    Comments (10) | Send Message
     
    l think the best solution for petroleum prices is electricity. governments should support these projects. and as we saw in 2008 the decrasing in Brent petroelum prices does not affect retail gasoline prices. there was a decreasing about 40 percent but this could not seen in retail prices.
    6 Mar 2011, 01:59 PM Reply Like
  • mozer
    , contributor
    Comments (6) | Send Message
     
    Now that the world we live in is all globalized and interconnected. It kinda makes me wonder if all these liberation thoughts and movements taking place in Middle East and Northern part of Africa are just parts of this bigger plan to drive up the oil prices to help out some of the other oil producing countries to get through these tough times. With some of the major oil suppliers and countries out of the picture in oil market.- Libya owning the 3.3 percent of the oil reserves and Saudi Arabia owning almost 20 percent of the world's oil reserves-. From some certain point of view it helps other oil producing companies and governments to obtain more profit out of their products.
    6 Mar 2011, 02:55 PM Reply Like
  • BuguOktem
    , contributor
    Comments (6) | Send Message
     
    With all this turmoil going on in the oil market maybe it's time governments and companies start to invest more on alternative energy sources, such as hydrogene based engines and electirical vehicles. We are going to run out of oil soon anyway so why not start now and support alternative energy sources.
    6 Mar 2011, 03:32 PM Reply Like
  • e172372
    , contributor
    Comments (6) | Send Message
     
    ı believe that there will be a long periods for countries to transform their investments to alternative energies.Up to now, oil is the major concern for majority of world and after these problems which occur in Middle East and North Africa , oil will continue to possess power to effect all of the world. So to change direction to other types of energies is not easy which is expected.
    6 Mar 2011, 03:43 PM Reply Like
  • fatmık
    , contributor
    Comments (2) | Send Message
     
    What is offered as a first stage solution by automative experts seem like a good solution. Taking an action like, turning off the engine when you are idle, tuning up the engine, and so on may help to decrease environmental pollution as well. also, when it comes to the correlation between refining company stocks and retail oil prices, it's a fact that there is a high correlation between them, at least in short run. However it's not certain that this correlation will continue with such a chaos era.
    6 Mar 2011, 05:27 PM Reply Like
  • asya.yavuz
    , contributor
    Comments (6) | Send Message
     
    According to the new from New York Times, other countries have never affected the oil prices too much as Libya did. Moreover, experts say this increase in oil prices will affect economic recovery negatively.Each $10 increase in the oil prices causes 0.5 percent recession in GDP.
    6 Mar 2011, 06:14 PM Reply Like
  • ezgikurt
    , contributor
    Comments (6) | Send Message
     
    this problem may indicate bigger issues. maybe the question that should now be asked is whether indicated rise in the energy stocks will later lead to an energy crisis? it's always been known that oil was a limited source - and now, more than ever as time preceeds and the oil prices will go up - they would even if there wasn't turmoil in the area because of scarcity. in long term, this might, with the new inventions in the electric-hybrid car industry and such, lead to bigger crisis than what's caused by oil. so now might be good time to invest in the energy stocks, but sustainability is the main policy that should be followed in the arena of energy.
    6 Mar 2011, 07:44 PM Reply Like
  • Alper Tokay
    , contributor
    Comment (1) | Send Message
     
    The rise in oil prices should was expected as the oil producing countries have some problems of their own. This however, gives us the opportunity to switch to other things since it is way cheaper now.
    On another perspective energy companies' stocks will continue rising as long as the oil prices keep rising. So it may be good time to invest.
    7 Mar 2011, 03:50 AM Reply Like
  • Koray Ucar
    , contributor
    Comments (6) | Send Message
     
    Nowhere is as much affected by the civil war in Middle East as Europe because only Libya has exported about seventeen twentieth of its petroleum to Europe and the uncertainty in this region may reduce the production a lot. Moreover, Libya may cut exportation of petroleum because of Gaddafi's threats to NATO and USA in order to avoid from the humanitarian aid from the Western Countries. These all factors will increase the oil prices very much. Therefore, particular sectors will be affected very negatively. It is seen that air transportation will be one of the most affected sectors since they always have to demand oil so as to continue their services.
    7 Mar 2011, 04:40 AM Reply Like
  • Cenk Sinar
    , contributor
    Comments (6) | Send Message
     
    Africa continent receives not only the American but also the Russian and Chinese investors. Especially, in The Republic of Sudan, Chinese investment reached 10 billion dollars, whereas instability of the mentioned countries give rise to low circulation of the oil trade for American oil company. Although,at this time, Chinese and Russian company have a better position, the political movement will give the last shape for this picture.
    7 Mar 2011, 05:06 AM Reply Like
  • economist_cagri23
    , contributor
    Comments (9) | Send Message
     
    I think although it seems that crises in Africa and Asia has directed by political issue ,it is about tricking of some big oil company. I think after months oil preice will decrease and loss making oil companies will benefit from this economic fluctuaion. Many countries' officals said that Libya is the small piece of oil povider. It should not change the balance of the oil prices. According to this ideas some companies are dissatisfied with global economical balance. May be some oil companies (such as BP ) think that increasing the prcie of oil in this crise decrease their losses.
    7 Mar 2011, 09:59 AM Reply Like
  • s.aydin
    , contributor
    Comments (5) | Send Message
     
    In today`s world , processing step of industrial product is based on oil.Recantly transportation system has improved so people need an consume more and more oil.Eventually ı can conclude oil is very crucial for our life.It is inevitable that oil price is affected by many political situation and international relationship.Considering Africa and Middle East posess %70 of oil reserve oin the world . In this area political situation have an impact onoil price greatly.
    7 Mar 2011, 02:42 PM Reply Like
  • m.ede
    , contributor
    Comments (6) | Send Message
     
    As long as the world is dependent to oil we need to get used to sharp raises on oil prices. Sure the oil will continue to be the major energy source for many years but there should be alternatives and the world should learn how to deal with its consequences to continue to consume more and more each year. Electricity consumption, as a clean and cheaper energy source, should be supported. The government should raise the number of wind power plants, especially in industrial areas. Politics is the other fatal reason of this problem and it seems that the only solution is generating alternatives to oil.
    7 Mar 2011, 07:52 PM Reply Like
  • mustafayilmaz
    , contributor
    Comments (19) | Send Message
     
    Gaddafi refuses to be as easily dismissed though and vows to take the country down with him. It is clear for all to see that the situation in the Middle East will be getting a lot worse before it gets any better, if it does. Most of the OECD countries rely on the Middle Eastern nations for most of their fuel needs. They will be in a lurch when matters get worse, if they do not find a trustworthy alternative source of fuel.
    8 Mar 2011, 01:38 PM Reply Like
  • Outsider elephant
    , contributor
    Comments (6) | Send Message
     
    Algeria and Libya are 2 members of the 12 OPEC which in trouble with riots in recent 2 months. This riot wave is spreading all around the North Africa and Middle East. 8 of 12 members of OPEC is on the Middle East and North Africa. This uncertainity about the near future in this area must cause rise in petrol prices.
    8 Mar 2011, 03:06 PM Reply Like
  • ebirced
    , contributor
    Comments (3) | Send Message
     
    The reasons that are written about the oil price boom, are logical and i agree with that. The political crisis' in the Middle East might also effect the oil prices. Therefore I think governments should preapare some precautions about this situation.
    8 Mar 2011, 03:40 PM Reply Like
  • gizemakar
    , contributor
    Comments (6) | Send Message
     
    Political chaos in the Middle East and North Africa caused an increase in oil prices.Since people demand more and more oil day by day,this price increase affected everybody.In order to stop this energy crisis,alternative energy resources have to be found.
    8 Mar 2011, 03:59 PM Reply Like
  • senelozturk
    , contributor
    Comments (5) | Send Message
     
    I think.This is not only about political crises. These energy companies are the most powerful companies so they speculate the oil price. Also they hide their real aim. Especially; they increase oil price dramatically and then decrease a little bit. People get used to new price. In 2002 oil average price is 20 dollars but now we are talking about 100 dollars. As a result, people pay much more than before.Moreover; each year number of oil companies are increasing. They don't want to lose their profit and they are playing with the oil price. These are all about wild competitions.
    8 Mar 2011, 05:32 PM Reply Like
  • dilara
    , contributor
    Comments (8) | Send Message
     
    The politic chaos and conflictions in North African Countries dramatically have been affecting the global economy. Libya is one of the most important countries in having crude oil and in oil export. Actually, these conflictions and restless conditions in that region caused a decrease in oil supply. In the news, it is written that speculations have made oil prices go up. You offered that investment in energy stocks is good to gain money and make profit.It is a good point because tha data you gave above shows the high correlation between retail oil prices and energy stocks.In the period in which oil prices have growing trend, making investment in energy sector is quite rational for investors.
    9 Mar 2011, 11:14 AM Reply Like
  • sinem
    , contributor
    Comments (2) | Send Message
     
    Firstly,thanks for providing me to see the interdependence of oil and gas companies.Secondly,before reading this article I have not thought that rising oil prices can benefit someones.For example;who has an energy stocks.It is so interesting for me
    4 May 2011, 11:59 AM Reply Like
  • BuguOktem
    , contributor
    Comments (6) | Send Message
     
    Now, there is another factor that might effect the oil prices. Osama Bin Laden's death might cause a chaos in the Middle East and it might effect the oil prices to increase.
    8 May 2011, 08:51 PM Reply Like
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