On the March 20 session, shares of oil giant Chevon (NYSE:CVX) popped up more than 3%, a rare showing of bullishness in an otherwise bleak year. However, there won’t be much celebrating. From the beginning of the year until this session, Chevron stock lost over half its market value. Frankly, I don’t think the volatility is over.
Obviously, the biggest concern for Chevron stock and the rest of the markets is the coronavirus pandemic. Although the Covid-19 outbreak appears to have finally stopped growing in China, the rest of the world is waking up to the nightmare. Currently, 186 countries and territories have at least one case. If recent trends are anything to go by, many of the small cases will escalate into severe crises.
But another, more industry-specific headwind plagues Chevron stock: the meltdown in relations between Russia and Saudi Arabia. When already weak oil prices started plummeting due to initial coronavirus fears, Saudi Arabia urged its resource-rich partner to further agreed-upon production cuts. Instead, Russia declined, wanting to produce more to bolster its economy.
Offended, Saudi Arabia decided to teach Russia a lesson and unleashed the spigot. Sensing that they can win this war of attrition, Russia also responded with production increases. While responding to the Saudis, the Russians undoubtedly have their eyes on disrupting American oil industries. Although this will impact the smaller names, the entire situation doesn’t help Chevron and large-scale rivals like Exxon Mobil (NYSE:XOM).
Worryingly, it doesn’t appear that either side will give up soon. I think it’s fair to say that both Saudi and Russian administrations operate from a bully pulpit. No one wants to be the first to blink.
Unprecedented Demand Crisis Plagues Chevron Stock
While our own administration has focused almost exclusively on China in recent days, the Saudi-Russian breakdown represents another risk in our over-dependence on globalized economic networks. As we desperately wage a battle against the coronavirus, these two bastions of rational thinking are about to nuke a critical energy market.
Whatever. For Chevron stock, the issue is no longer about supply but rather demand. Unfortunately, the oil sector will turn into a cruel game of musical chairs. With so little demand to support so much supply, there will not be many players left.
First, I think we must accept the reality that – barring a miracle — the U.S. will endure a severe recession. I don’t think any developed, top-tier nation has turned off their economy and rebooted it with minimal hiccups. That said, I guess we’re about to find out.
Last week, California Governor Gavin Newsom made the shock decision to impose a statewide mandatory stay-at-home order. This has resulted in surreal images of Los Angeles turning into a ghost town. Not only that, New York and Illinois are following California’s lead. Ominously, no one knows how long this order will last.
As a separate entity, California has the world’s fifth-largest economy. New York’s economy is roughly equivalent to that of Iran’s. With these two states shutting down all non-essential services, their governors are playing a very dangerous game. Awkwardly, killing a state’s economy may be worse for residents’ overall health in the long run.
Of course, with millions of people staying at home, this will have a huge ripple effect for Chevron stock and its ilk. Especially considering California’s automotive culture – and New York is no slouch here – I don’t see any positive outcomes.
Chevron May Be a Buy Much, Much Later
This isn’t to say that Chevron stock is going to zero. If I had to guess, Chevron and Exxon Mobil will stick around. But they’re looking at taking deep losses as the markets continue to price in the broader economic impact. And no, I don’t think the worst is behind us.
Look, the U.S. airliner industry is basically grounded. Several of these companies are on the brink of disaster. Further, all travel-related industries – such as cruise liners and hotels – face equally challenging times as consumers no longer want or are able to move. Logically, this will crimp growth opportunities for Chevron.
And as I mentioned earlier, the Saudi Arabia’s conflict with Russia probably won’t end any time soon. To play devil’s advocate, there’s no reason to. Both countries have global ambitions in this zero-sum game. With America considerably weakened, now’s the best time to make one’s mark.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
