Why are oil prices so low?

[Laissez Faire]

Ultimately empirical data shows us there is a very strong correlation to oil prices and emerging market growth. So if you buy into higher oil prices then you better be extremely bullish on risk assets and emerging market growth. I'm not quite as bullish and think we might enter another recession before we get the next uptick in the credit expansion cycle.

No opinion one way or the other. At least not yet. But I'm thinking that Statoil eventually will become a good buy. For now, the trend remains down, so I'm just watching and waiting for signs of a bottom.

The fact is that I've been out of the market for a while and am trying to gather information such that I can make an, hopefully, clever trade sooner or later.

 

[Jayce Nugent]

One may make the argument that Oil prices are from supply and demand.... Supply is easy to determine (how much oil is being produced) but demand for energy is a global matter... so I plotted the World Stock ETF above and Oil below... and this is what you get.

As you can see Oil has broken support and completed a head and shoulders pattern. At the same time the World Stock ETF broke down. The next major support in Oil is at $40. And the ETF is at resistance. If the rest of the world slows down the American market could still continue up because of a flight to safety.


Of course this is only my opinion... blah blah blah and all the other stuff everyone says to absolve themselves of whatever they say

 

[Laissez Faire]

Does anyone know how oil stocks in general correlate with the oil price?

I'm going to see if I can do some work in Excel on Statoil at the end of the week. Don't see myself buying the stock this week anyway. It's still sliding and it looks like there's potential for perhaps 10% more down side. Maybe more.

Eventually, it should be a good buy though. And then, I think I'm going to buy it.

 

[Maverick74]

Does anyone know how oil stocks in general correlate with the oil price?

I'm going to see if I can do some work in Excel on Statoil at the end of the week. Don't see myself buying the stock this week anyway. It's still sliding and it looks like there's potential for perhaps 10% more down side. Maybe more.

Eventually, it should be a good buy though. And then, I think I'm going to buy it.

Almost zero correlation. But it really depends on the "type" of stock. E&P vs a refiner, vs service company vs a driller vs a marketer.

 

[Laissez Faire]

Almost zero correlation. But it really depends on the "type" of stock. E&P vs a refiner, vs service company vs a driller vs a marketer.

Really? Do you run your own analysis or do you have a link to research on this?

Intuitively, I would imagine the correlation to not be very high, but I would never have guessed 'almost zero'.

I also understand that it depends on the type of stock, hence my 'general' in front of oil stocks. Statoil is among the largest corporations in the world and should be a solid company.

 

[riskaddict]

When RIG cuts it's Div and goes to 8 that seems like it might be a good opportunity especially after SDRL goes out of business. In the mean time just keep buying corn!

 

[Maverick74]

Really? Do you run your own analysis or do you have a link to research on this?

Intuitively, I would imagine the correlation to not be very high, but I would never have guessed 'almost zero'.

I also understand that it depends on the type of stock, hence my 'general' in front of oil stocks. Statoil is among the largest corporations in the world and should be a solid company.

Yeah oil companies are notorious for being hard to trade. You really have to understand the complexities in their revenue stream. For example, most E&P are valued based on proven reserves they hold as assets. Well the numbers they report are no where in the vicinity of being accurate. If they are a refiner, in theory the margins on their crack spreads should key you in to value. But yeah, price of oil has nothing to do with it. How much of their production have they already hedged. For refiners how much margin have they locked in on their forward curve. Higher oil prices can actually hurt them. For drillers it's almost all politics and predicted future regulations with some Geo-poltical thrown in.

 

[None Business]

The big-bank Analysts do a very good job covering these companies and if you Google well you can find their notes without paying for them.

 

[Laissez Faire]

Yeah oil companies are notorious for being hard to trade. You really have to understand the complexities in their revenue stream. For example, most E&P are valued based on proven reserves they hold as assets. Well the numbers they report are no where in the vicinity of being accurate. If they are a refiner, in theory the margins on their crack spreads should key you in to value. But yeah, price of oil has nothing to do with it. How much of their production have they already hedged. For refiners how much margin have they locked in on their forward curve. Higher oil prices can actually hurt them. For drillers it's almost all politics and predicted future regulations with some Geo-poltical thrown in.

Yes, I understand it is complex issue. Still, my question was about the correlation between the price of oil stocks and the price of oil, not if these companies were still able to make money or had hedged their production.

For example, the main index on Oslo Stock Exchange is down 8,8% the last three months, while the Statoil stock is down roughly 30%. Without doing an in depth analysis, it would seem as during this period, the stock price of Statoil correllates well with the oil price.

Historically, I think Oslo Stock Exchange has correlated fairly well with oil prices, but it seems that relationship was suspended after QE.

 

[Maverick74]

Yes, I understand it is complex issue. Still, my question was about the correlation between the price of oil stocks and the price of oil, not if these companies were still able to make money or had hedged their production.

For example, the main index on Oslo Stock Exchange is down 8,8% the last three months, while the Statoil stock is down roughly 30%. Without doing an in depth analysis, it would seem as during this period, the stock price of Statoil correllates well with the oil price.

Historically, I think Oslo Stock Exchange has correlated fairly well with oil prices, but it seems that relationship was suspended after QE.

When you analyze correlation, you need to understand what's affecting each coefficient. It's easy to make the assumption that that is A goes down and B goes down together that B is going down "because" of A. There are actually endless variables inbetween A and B you are not accounting for that could be driving what you think is the correlation. For example, when oil prices go down, sentiment about oil might go down. When sentiment goes down, price goes down. But what are all the variables driving sentiment. It's probably not just price.

Simply looking at a correlation is not sufficient. And trading on that correlation is criminal. When looking at data, it's not the absolute value you are concerned about, but rather what is driving that value. Quantitative finance exists for a reason.