2017 was a poor year for the oil and gas industry. It was plagued by lower oil prices, bankruptcies, and the closure of refineries in major producing countries — all of which led to a bearish sentiment among investors. Stocks of oil and gas equipment, drillers, and producers were three of the worst performing sectors of the year.
However, in 2018, it is predicted that oil stocks will experience a resurgence. Forbes analyst Claire Poole believes that the energy cycle has already bottomed, which means that the only way for the oil stocks is up. Poole detailed how RBC Capital Markets think that oil and gas stocks are now entering the second year of recovery, which is why oil macro investments are getting more attractive. In addition, global oil prices are now beginning to respond to the world’s demand. The Correlation Between Oil and Stock Prices in 2018 Click To TweetRBC has some insights with regards to the sub-sectors of the oil sector for 2018. For oil drilling and distribution companies, they assert that the real test for them this year is maintaining profitable costs on operations while increasing distributions to stockholders. The company also states that the Suncor Energy of Canada and Royal Dutch Shell of the Netherlands have the highest probability of doing both.
The company believes that the there will be an improvement with the investor sentiment toward U.S. exploration and production companies due to climbing oil prices. It predicts that dividends per share in the oil industry will increase by 30%, and spending will at least grow by 10%. Debt adjustments due to drawbacks from the past 3 years will also increase by 20%.
RBC also revealed that the money is in oil exploration contracts. However, some analysts are sceptical if the U.S. exploration companies will rally in 2018, especially since most of the easily extractable oil from the Earth’s surface has already been tapped. The Organization of Petroleum Exporting Countries’ strategy this year is also still unknown in case liquefied natural gas makes a return to investor’s portfolios this year.
As for oil construction and service companies, their stocks are predicted to reverse and generate positive revenues this year due to enhancements in technology and the capacity to hold more crude oil.
The age-old correlation of oil and stock prices
The relationship between oil and stock prices have long been inversely correlated. Historical data shows that there is a definite correlation between the two, and the complexities of the connection have been studied for years. Several authorities in finance have analysed the connection for years, including the International Monetary Fund, U.S. Federal Reserve, U.S. Energy Information Administration, and the Bank Of International Settlements.
In simple terms, the correlation between oil and stock prices are as follows: when oil prices rise, equity valuations are pulled down. On the other hand, when oil prices decline, equity valuations go up.
In a study presented by FXCM on the correlation between oil and stock prices, the connection between the Dow Jones Industrial Average and crude oil pricing from the 90s to 2011 were examined in depth. Below are the patterns that the study has revealed:
- From 7/1/1997 to 16/2/1999 oil and stocks had a negative correlation of -0.84.
- From 19/2/2009 to 27/4/2011 oil and stocks had a positive correlation of +0.94.
- Several prolonged periods of no correlation between -0.30 and +0.30 were observed.
- An aggregate positive correlation of +0.69 was present.
In short, the studies show a solid connection from 1991 to 2011, with clear positive and negative correlations. When oil stocks skyrocket or a selloff of indices happen, it is almost always because of energy pricing. The question is now whether energy prices in 2018 will follow this trend and oil stocks will rebound?