Correlation Between Heating Oil and Brent Crude

Can any of the company-specific risk be diversified away by investing in both Heating Oil and Brent Crude at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Heating Oil and Brent Crude into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Heating Oil and Brent Crude Oil, you can compare the effects of market volatilities on Heating Oil and Brent Crude and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Heating Oil with a short position of Brent Crude. Check out your portfolio center. Please also check ongoing floating volatility patterns of Heating Oil and Brent Crude.

Diversification Opportunities for Heating Oil and Brent Crude

0.84

Correlation Coefficient

Heating Oil  Brent Crude

Very poor diversification

The 3 months correlation between Heating and Brent is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Heating Oil and Brent Crude Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Brent Crude Oil and Heating Oil is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Heating Oil are associated (or correlated) with Brent Crude. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Brent Crude Oil has no effect on the direction of Heating Oil i.e., Heating Oil and Brent Crude go up and down completely randomly.

Pair Corralation between Heating Oil and Brent Crude

Assuming the 90 days horizon Heating Oil is expected to under-perform the Brent Crude. But the commodity apears to be less risky and, when comparing its historical volatility, Heating Oil is 1.05 times less risky than Brent Crude. The commodity trades about -0.02 of its potential returns per unit of risk. The Brent Crude Oil is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  7,330  in Brent Crude Oil on September 2, 2024 and sell it today you would lose (36.00) from holding Brent Crude Oil or give up 0.49% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Heating Oil  vs.  Brent Crude Oil

Heating Oil

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Heating Oil has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Heating Oil is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Brent Crude Oil

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Brent Crude Oil has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Brent Crude is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Heating Oil and Brent Crude

The main advantage of trading using opposite Heating Oil and Brent Crude positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Heating Oil position performs unexpectedly, Brent Crude can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Brent Crude will offset losses from the drop in Brent Crude's long position.

The idea behind Heating Oil and Brent Crude Oil pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.