Correlation Between Natural Gas and Heating Oil

Can any of the company-specific risk be diversified away by investing in both Natural Gas and Heating Oil 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 Natural Gas and Heating Oil into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Natural Gas and Heating Oil, you can compare the effects of market volatilities on Natural Gas and Heating Oil 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 Natural Gas with a short position of Heating Oil. Check out your portfolio center. Please also check ongoing floating volatility patterns of Natural Gas and Heating Oil.

Diversification Opportunities for Natural Gas and Heating Oil

0.35

Correlation Coefficient

Natural Gas  Heating Oil

Weak diversification

The 3 months correlation between Natural and Heating is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Natural Gas and Heating Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Heating Oil and Natural Gas 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 Natural Gas are associated (or correlated) with Heating Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Heating Oil has no effect on the direction of Natural Gas i.e., Natural Gas and Heating Oil go up and down completely randomly.

Pair Corralation between Natural Gas and Heating Oil

Assuming the 90 days horizon Natural Gas is expected to generate 2.54 times more return on investment than Heating Oil. However, Natural Gas is 2.54 times more volatile than Heating Oil. It trades about 0.16 of its potential returns per unit of risk. Heating Oil is currently generating about -0.02 per unit of risk. If you would invest  219.00  in Natural Gas on September 2, 2024 and sell it today you would earn a total of  117.00  from holding Natural Gas or generate 53.42% return on investment over 90 days.

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

Natural Gas  vs.  Heating Oil

Natural Gas

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Natural Gas are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Natural Gas exhibited solid returns over the last few months and may actually be approaching a breakup point.

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.

Pair Trading with Natural Gas and Heating Oil

The main advantage of trading using opposite Natural Gas and Heating Oil positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Natural Gas position performs unexpectedly, Heating Oil 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 Heating Oil will offset losses from the drop in Heating Oil's long position.

The idea behind Natural Gas and Heating 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.