Crude oil on the boil: Will it continue to rise? Is price movement of ONGC & crude oil price correlated?

Now, the interesting thing is that usually, whenever there is a jump in crude oil price, one stock often garners a lot of limelight and that is ONGC.

Crude oil has become the talk of the town all over again. Brent crude spot prices breached the $75 a barrel mark recently. On a YTD basis, Brent crude jumped 49.11 per cent while on an MTD basis, it is up by 9.41 per cent. So, now, the million-dollar question is, will crude oil continue its upmove or not?!  

Let’s deep dive and check what the technical chart of Brent crude oil suggests. We are taking reference from the monthly chart of Brent crude, which shows a major long-term breakout in price. Crude had reached its peak near the USD 147 mark in the year 2008. This trendline has been drawn from the levels of about USD 147 and thereafter, it joins the subsequent lower tops. Crude prices tested this falling trend line resistance not just twice or thrice but as many as 6 times and still, could not penetrate. However, in this month (June), we have seen the price breaking out of this 13-year old trend line resistance. Even if the crude consolidates and takes some breather, the breakout would pretty much remain valid as long as crude stays above the USD 69 mark.  

CHART OF BRENT CRUDE

Now, the interesting thing is that usually, whenever there is a jump in crude oil price, one stock often garners a lot of limelight and that is ONGC. The stock is said to be a proxy play for the rise in crude oil price; however, the data holds true on the weekly chart but if we examine the daily charts, the stock doesn't seem to exhibit any specific pattern of correlation with the crude price.

Here is what Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst & Founder of Gemstone Equity Research & Advisory Services, has to say on this: 

While examining correlation, ONGC is seen as one of the very few stocks that establishes a direct relationship with the crude price. However, this correlation is established only on the weekly charts. If we examine the daily charts, the stock doesn't seem to exhibit any specific pattern of correlation with the crude price. However, on examining the weekly charts, it is observed that ONGC has stayed largely positively in correlation with the Brent prices. There was a brief period between 2018 and 2020, where the correlation of ONGC with the Brent crude price had turned negative. However, apart from this, it is evident that the stock has mostly seen a positive correlation of 0.40 & higher in the past several years. 

Correlation on the weekly chart

YTD Relative Performance Chart 

The YTD performance of ONGC and Brent crude shows that while Brent gained 49.11 per cent, ONGC appreciated by 24.70 per cent. A close examination of the relative performance chart shows that in the previous month while Brent continued to spurt, ONGC lagged in its performance. So, will ONGC play a catch-up? Only time will tell!