It’s a dark time for oil stocks in general and Chevron (NYSE:CVX) stock in particular. Saudi Arabia’s decision to tremendously raise its oil output, along with the outbreak of the coronavirus from China, have pushed oil prices down.
In the wake of all this, it’s not surprising that CVX stock has fallen 35% in the last month. But four factors are likely to push the stock higher within the next six months.
After the Saudis decided to raise their oil output in reaction to Russia’s refusal to cut its own supply, the two sides are talking. According to The Wall Street Journal, Saudi officials said that the two countries are negotiating in an effort to “reverse the production hikes and revive the collective OPEC-Russia output curbs.”
The two countries would not be talking if both did not have some interest in reaching a deal on increasing output.
Furthermore, Saudi Arabia needs higher oil prices in order to pay for its budget. Although Russia is not in the same boat, I’m sure that Moscow would also benefit from higher oil prices. As a result, it’s in both countries’ interest to lower their output at some point.
Finally, Russia reportedly refused to decrease its output because it wants to put U.S. shale oil producers out of business. That seems to already be happening, and as that process drags on, Russia will probably reach some sort of output reduction deal with Saudi Arabia. That idea leads very well into my next point.
Shale Output Reductions Will Boost Oil Prices
According to investment bank Raymond James, oil prices should bottom when shale producers begin to cut their production. That is the same process that played out four years ago, the bank noted.
And the process has already started, with multiple producers, including Diamondback Energy (NASDAQ:FANG), Marathon Oil (NYSE:MRO) and Parsley Energy (NYSE:PE) all announcing plans to reduce their output.
In conjunction with demand increases due to the easing of the coronavirus outbreak, those supply cuts should push oil prices higher.
Coronavirus Outbreak Will Ease Soon
As I’ve noted previously, experts have said that the virus does not spread very much when the weather is very warm. Hot places like Singapore, Taiwan and Hong Kong have had very few cases of the coronavirus. As of March 17, Hawaii and Arizona have had 10 and 19 cases, respectively, of the virus.
Even the U.S. media, which has been extremely alarmist about the virus, is starting to at least consider the possibility that the virus may not be very prolific during warm weather.
Also starting on March 12, I began seeing news articles suggesting that all-encompassing fear of the virus by the less vulnerable demographic groups (healthy people under the age of 50) may not be justified. For example, multiple outlets published an article, which originally appeared on CNN, about a woman who had the virus and recovered. The story’s lead even stated that the woman’s message was, “Don’t panic.”
Assuming the media continues to turn down the panic and the spread of the virus eases as the weather gets warmer, demand for gasoline should begin rebounding slowly. It should then accelerate in April and May.
Chevron Has a Strong Balance Sheet
After conducting a stress test on Chevron, Morgan Stanley reported that the company has “very strong balance sheet(s)” that can withstand $30 per barrel oil in the second quarter and $36-$40 per barrel oil in the second half of the year.
Chevron, whose dividend yield is now over 7%, may have to cut its dividend soon. But its yield will probably remain over 3%, given the strength of its balance sheet. A yield of that level is very attractive in our extremely low interest environment.
The Bottom Line on CVX Stock
A combination of positive supply and demand drivers should push oil prices higher within the next six months. And when that happens, Chevron will rise above its current levels.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not hold a position in any of the aforementioned securities.