U.S. energy sector titan Chevron (NYSE:CVX) has fallen below its 200-day moving average on Monday for the first time since March 2016. The pullback in CVX stock comes amid fresh concerns about the supply-demand balance in the global energy market as inventories swell, U.S. shale producers ramp up output and OPEC members look set to cheat on their production freeze agreement.
West Texas Intermediate Crude Oil has spent the better part of the past year oscillating near the $50-a-barrel level. But fresh volatility looks likely now as recent disappointment in the flow of U.S. economic data creates yet another headwind for crude oil prices and the stocks in the energy sector.
Consider this: Since oil prices peaked in 2014, as OPEC unleashed a price war to crush U.S. shale producers and recapture market share, U.S. producers have lowered their break-even cost to just $35 a barrel. As a result, the Energy Information Administration (EIA) is projecting record U.S. output of 9.7 million barrels per day in 2018.
U.S. oil rig activity increased for the 14th straight week last week, the highest since April 2015. Inventories are high as well, with Cushing, Oklahoma, stockpiles at a record high.
So even as Saudi Arabia is calling on OPEC to extend its production freeze agreement, traders are becoming increasingly concerned Riyadh is losing control of the global energy market. And that means prices are likely headed lower to squeeze supply out of the market and restore supply-demand balance.
For that to happen, energy sector earnings will need to come under further pressure.
Turning back to CVX stock, shares are already down more than 10% from their December/January highs, but look set for another 6% drop back to their August-October range from last year near the $100-a-share level.
Chevron will next report results on April 28 before the bell. Analysts are looking for earnings of 89 cents per share on revenues of $36.8 billion.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
