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Canadian oil prices are down 25 per cent since October 18 and yet the S&P/TSX Oil Producers index is lower by only 2 per cent. This raises some obvious questions, not to mention justifiable fear that the bottom is about to drop out of domestic energy stock prices.

An in-depth look at the data, however, shows that the relationship between domestic crude prices and the stock market is complicated. Investors likely have less to worry about than it might appear.

The table below shows the correlation between all members of the S&P/TSX Oil Producer Index and the Western Canadian Select (WCS) oil spot price over the past 24 months. The numbers are surprisingly low. Not only that, energy services companies – and not the producers selling at the spot price – dominate the top of the list.

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It's also clear from the table that domestic oil stocks are significantly more affected by the U.S. WTI crude price than domestic crude levels.

WTI is a better indicator of demand for Canadian oil than the domestic price for the exact reason the Keystone pipeline is so important for the industry's future; there's U.S. demand for our oil, we just can't get it there to sell.

The big drop in WCS was caused by an announced plan by Enbridge – the largest transporter of oil to the U.S. – to reduce cross-border pipeline capacity in November. Reuters reports that "pipeline rationing means more of the oil sands' fast-growing production may get bottlenecked in Canada, prompting deep discounts."

So far, investors seem willing to look past the potential threat lower domestic energy prices pose to fourth-quarter profits. This makes sense; revenue is merely delayed, not disappearing if U.S. demand levels, don't change drastically.

Average correlation to WCS: 0.14
Average correlation to WTI: 0.28

To view the full table on your mobile device, click here: http://bit.ly/1hQm2hH

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