Idea of the Day: Glencore poised to outperform as oil slumps

What: crude oil has fallen sharply in today’s session and has made a fresh low for 2017. The crude oil price has generally had a torrid few months, and Brent crude oil has fallen $10 since the end of May. For those of you who trade oil, it is worth looking at the stocks most correlated to the oil price.

What: crude oil has fallen sharply in today’s session and has made a fresh low for 2017. The crude oil price has generally had a torrid few months, and Brent crude oil has fallen $10 since the end of May. For those of you who trade oil, it is worth looking at the stocks most correlated to the oil price. Below we did a simple correlation analysis to find which commodity company had the strongest correlation to the oil price, and to see which company is the least sensitive to the move in the crude price.

How: Our analysis, which looks at daily correlations, has found that Glencore has the lowest correlation with the Brent crude price since the start of the year, and has moved with Brent just 18% of the time. In contrast, BP and Shell have moved with the oil price 35% and 39% of the time since January. Although Glencore’s correlation with the oil price has increased in recent months, it has not increased by nearly as much as BP’s, which stands at 63% since May compared to 34% for Glencore and 43% for Shell.

However, June has been a game-changer for the oil producers with BP and Shell moving with the oil price 75% and 71% of the time, respectively. In contrast, Glencore’s correlation with oil has remained relatively stable this month at 33%, even though the oil price has been under sustained pressure.

It shouldn’t be surprising that large oil producers are correlated so closely to the oil price compared to a commodity trader, such as Glencore. Although Glencore has a physical oil business, it does not pump oil out of the ground, and can make money when the oil price rises and falls. Of course, Shell and BP’s trading arms can also make money when the oil price slumps, however, the BP and Shell production businesses suffer, which can eradicate the benefit of having a trading arm.

Surprisingly, even though Glencore is less correlated to the oil price, its share price has underperformed Shell and BP since April this year, and has continued to underperform even as the oil price has tumbled sharply since the end of May. Thus, Glencore could be due a recovery, and we believe that Glencore’s underperformance vs. Shell and BP is unsustainable if the oil price continues to tumble.

Chart 1: 

Source: City Index and Bloomberg 

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