Why are oil prices so low?

[Laissez Faire]

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.

I may be stupid, but I'm not that stupid. And there's certainly a lot of people that's more stupid than me in this world.

What you're saying here is merely statistics 101, i. e., correlation does not imply causation.

I'm merely curious about the correlation between the oil price and oil stocks. I've heard of more crazy assumptions than this and I didn't say I was interested in using correlation alone as a trade idea. Still interested to know where you get close to zero correlation from.

 

[Laissez Faire]

If it wasn't obvious, the reason I was interested in the correlation between Statoil and the oil price is because I wanted to know if it was reasonable to expect Statoil to bottom out when oil does.

Thus, even if I should start to become more bullish on Statoil and reason that it's oversold, it would still be premature to enter if I gathered that the price of oil had at least 10$ more down side potential.

Not that I'm clever enough to know either of course.

 

[Maverick74]

If it wasn't obvious, the reason I was interested in the correlation between Statoil and the oil price is because I wanted to know if it was reasonable to expect Statoil to bottom out when oil does.

Thus, even if I should start to become more bullish on Statoil and reason that it's oversold, it would still be premature to enter if I gathered that the price of oil had at least 10$ more down side potential.

Not that I'm clever enough to know either of course.

I know that is what you're asking and that is what I'm trying to tell you. Using oil as your trigger is not a good idea. Oil stock prices are correlated to their actual operating margins, not the price of oil. For many companies, their margins have actually improved with lower oil prices. For others, their margins will get worse if oil goes higher. I'm just trying to tell you not to use the price of oil as your benchmark. You would be better off just investing in oil by itself.

 

[Laissez Faire]

I know that is what you're asking and that is what I'm trying to tell you. Using oil as your trigger is not a good idea. Oil stock prices are correlated to their actual operating margins, not the price of oil. For many companies, their margins have actually improved with lower oil prices. For others, their margins will get worse if oil goes higher. I'm just trying to tell you not to use the price of oil as your benchmark. You would be better off just investing in oil by itself.

No offense, but I'm not just going to take your word for it, since I don't know you and even if I did, I've learned not to trust other people's analysis if I don't understand it myself. It could of course be completely random, but just by looking at a chart, I can tell you that Statoil's stock price has followed oil fairly intimately for the last few months.

Of course, that could be completely random, but to me, it seems worth paying attention to. And even if there is a correlation right now and there is even causation, yes, I do know that this relationship will be suspended at some point.

Not interested in commodities at the moment. Stocks will have to do for now.

 

[Maverick74]

No offense, but I'm not just going to take your word for it, since I don't know you and even if I did, I've learned not to trust other people's analysis if I don't understand it myself. It could of course be completely random, but just by looking at a chart, I can tell you that Statoil's stock price has followed oil fairly intimately for the last few months.

Of course, that could be completely random, but to me, it seems worth paying attention to. And even if there is a correlation right now and there is even causation, yes, I do know that this relationship will be suspended at some point.

Not interested in commodities at the moment. Stocks will have to do for now.

I'm not trying to "teach" you anything or get you to "believe" me. I'm asking for YOU to do the work. Don't take my word for any one else's I refer you to on the internet. Just learn this stuff on your own. I've done the work. I've spent close to 20 years doing the work. I can't give you a satisfactory answer that good old fashioned hard work can't provide better. The best way to motivate yourself is to put some money on the table, watch somebody take it from you, then maybe you will get mad enough to get the better of him next time. It means you have to out work him.

 

[TGregg]

You've heard of peak oil, right? Well, this is trough oil.

 

[Laissez Faire]

I'm not trying to "teach" you anything or get you to "believe" me. I'm asking for YOU to do the work. Don't take my word for any one else's I refer you to on the internet. Just learn this stuff on your own. I've done the work. I've spent close to 20 years doing the work. I can't give you a satisfactory answer that good old fashioned hard work can't provide better. The best way to motivate yourself is to put some money on the table, watch somebody take it from you, then maybe you will get mad enough to get the better of him next time. It means you have to out work him.

Swing trading stocks isn't necessarily zero sum, is it?

And even if I were day trading futures, it doesn't mean I have to out work someone else, does it?

Anyway, I'm only asking you to back your claims, i.e., zero correlation between oil stocks and the oil price, oil being a worthless indicator for oil stocks, etc, and I'm saying that if you can't, I won't take what you say at face value. I will however listen to what you say and look further into it myself, although from what I'm seeing already, you can be wrong.

 

[Maverick74]

Swing trading stocks isn't necessarily zero sum, is it?

And even if I were day trading futures, it doesn't mean I have to out work someone else, does it?

Anyway, I'm only asking you to back your claims, i.e., zero correlation between oil stocks and the oil price, oil being a worthless indicator for oil stocks, etc, and I'm saying that if you can't, I won't take what you say at face value. I will however listen to what you say and look further into it myself, although from what I'm seeing already, you can be wrong.

Alpha is zero sum, index is not. If you are looking for value, you are going to have to work for it. If you just want an index return, then you spread your money around and get index. And by index I don't mean the S&P500, I mean it more in a broad sense. There is nothing to prove or not prove. ALL correlation is complicated. You can't make blanket assertions about any type of correlation. It's not just limited to oil and oil stocks. If you don't believe me, which is fine, do the work. There are 600 page mathematical texts devoted solely to the topic of correlation. If you think it's so simple as plotting a chart of oil and statoil on top of each other then like I said, vote with your wallet. Markets are a great teacher as well as disciplinarian.

 

[EXavier]

Laissez...what's your rationale for STO? And if there really is a discernible correlation between crude oil prices and energy stocks, why specifically STO over its peers?

 

[Laissez Faire]

ALL correlation is complicated. You can't make blanket assertions about any type of correlation. It's not just limited to oil and oil stocks. If you don't believe me, which is fine, do the work. There are 600 page mathematical texts devoted solely to the topic of correlation. If you think it's so simple as plotting a chart of oil and statoil on top of each other then like I said,

Listen, I study math at university level. I know a thing or two about 600 page textbooks. You're the one who's making a load of assumptions here from me asking a simple question that you're not even able to answer in the end.

I'm quite confident that even those who are really good at this start out with the simple questions and relationships before they delve deeper into their analysis.

Why aren't there more PhD top traders if analyzing something to death is the solution?

Often, in life, brilliance lies in simplicity and the ability to be succint. I don't think trading is no different.

Vote with your wallet. Markets are a great teacher as well as disciplinarian.

Maybe I will. And when I do, I'll post my trade here.