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The Relationship between Oil, Drillers and Refiners

Considering this Memorial Day weekend officially kicked off the "driving season" I decided to do some research on the sky high oil prices that are behind the sky high prices at the pump. In particular, I did some tests on the relationship between the price of oil, the price of oil driller stocks, and the price of oil refiner stocks.

I'm sure most of you already know that when oil prices go up, oil driller stocks also tend to go up, and oil refiner stocks tend to go down. Just to double check this conventional wisdom, I ran some regression models. Using daily price data from the beginning of 2007 through this week, I ran five separate regressions models:

1) Oil versus Transocean (RIG): RIG is an oil driller, and there is a very strong positive relationship between the price of oil and the price of RIG. In fact, oil prices have explained 92% of the total variability in the price of RIG. Specifically, the price of RIG is positively impacted when oil prices go up, and negatively impacted when oil prices go down. For reference, during this time period, oil prices have increased 124% and RIG has increased 109% while the SP500 has actually fallen about 1%.

2) Oil versus Tesoro (TSO): TSO is an oil refiner, and there is a very strong negative relationship between oil prices and the price of TSO. Generally speaking, the price of TSO is negatively impacted on days when oil prices rise, and vice-versa. For reference, the price of oil explains 31% of the total variability in the price of TSO.

3) Oil versus Diamond Offshore Drilling (DO): DO is an oil driller, and there is a very strong positive relationship between oil prices and the price of DO. In fact, oil prices explain 86% of the total variability in the price of DO. The price of DO is positively impacted on days when oil prices go up, and negatively impacted on days when oil prices go down.

4) Oil versus Valero Energy (VLO). VLO is an oil refiner, and there is a very strong negative relationship between oil prices and the price of VLO. In fact, oil prices have explained about 14% of the total variability in the price of VLO during this time period. Generally speaking, VLO is negatively impacted when oil prices rise.

5) Oil versus the S&P500. There is a very strong negative relationship between oil prices and the price of the S&P500 (a proxy for the overall market). In fact, oil prices have explained 18% of the total variability in the price of the S&P500. This means that when oil prices go up it has a negative impact on the S&P500.

To summarize the above: If oil prices go up, oil driller stocks tend to go up, and oil refiner stocks tend to go down. Further, the positive correlation between oil prices and oil drillers is stronger than the negative correlation between oil prices and oil refiners. Further, rising oil prices negatively impact the overall stock market as measured by the S&P500.

Anyway, I've been further fiddling around with the data in attempt to find some way to use oil prices to predict future stock prices. I've tried lagged variables, autoregressive models, and moving average input variables, to name a few. Unfortunately, I haven't been able to come up with any good predictive models, so I'm giving up for now.

I've tried lagged variables, autoregressive models, and moving average input variables, to name a few. Unfortunately, I haven't been able to come up with any good predictive models, so I'm giving up for now.