After years of sideways price action, the crude-oil market has taken a bizarre turn. A number of factors have made the oil market unpredictable. However, nimble traders may be able to capitalize on this through a position in Chevron (NYSE:CVX). Chevron stock looks to be on the verge of sustainable gains.
Chevron’s business model isn’t entirely dependent on oil, but if you’re considering taking a position in the stock, you’ll definitely need to pay attention to the oil price. Plus, you’ll want to keep track of the fragile relations between nations, which can change from day to day.
In case that’s not enough for you, you’ll also want to watch the company itself as each energy-sector company is unique. There are a lot of moving parts here, but informed investors might be able to piece together a complete picture of Chevron’s prospects for future growth.
Black Swans and Chevron Stock
West Texas Intermediate (WTI) is considered the “lightest” and “sweetest” commonly available crude oil, meaning that it’s the highest quality for transportation purposes. It’s the gold standard for the international oil trade.
A barrel of WTI crude oil cost more than $140 in 2008 when the financial crisis was in progress. As recently as 2016, the oil price fell to $26 and change. More recently, it spent the better part of a year stuck in a range between $35 and $70-ish.
Long-standing trading ranges can be boring and sometimes lead to complacency among traders. They might forget that trading ranges are not set in stone. A black-swan type of event can push the oil price far above or below the range.
In the case of oil this year, there was a black-swan event in the form of the spread of the novel coronavirus. This caused the demand for oil to decline precipitously since people weren’t traveling as much.
At the same time, Saudi Arabia and Russia fought to get the oil price low enough to potentially put American shale-oil producers out of business. On top of all that, there was a lack of storage space for all of the excess barrels of oil.
So really, it was a flock of black swans all converging on the oil market at once. The result was unprecedented and, to be honest, unthinkable: WTI crude oil traded briefly at -$37.63 per barrel. (No, your eyes aren’t deceiving you. That is, indeed, a negative sign in front of the dollar sign.)
Navigating Uncharted Waters
Let’s take a step back for a moment and look at how this could impact Chevron in particular. Oil-price collapses have happened before and they’re usually viewed as net negative for energy-sector companies like Chevron.
But then, this is no run-of-the-mill oil-price collapse. Still, it’s the smaller players in the oil game that are at risk of folding. An energy giant like Chevron should be able to withstand even an oil rout of this magnitude.
On the other hand, a wrench has been thrown into the mix in the form of a White House-mandated ban on drilling oil in, and exporting oil from, Venezuela. A handful of mega-cap energy companies were still operating in Venezuela when this order was issued, and Chevron was among them.
The evident purpose of the ban is to put pressure on the nation to oust President Nicolas Maduro.
As a senior U.S. official explained, Chevron’s Venezuela-based oil assets “are mothballed and essentially it’s… a de facto wind-down, which allows them to just ensure that their assets remain viable and that the Venezuelan people that work for them are able to continue getting paid during these dire times.”
This, combined with the oil-price collapse, could put downward pressure on Chevron stock for a while. Therefore, in order to create a more favorable risk-to-reward scenario, value-focused investors should only consider buying the shares if they dip below $70.
The Takeaway on Chevron Stock
Even if you buy Chevron stock at the current price, you’ll still probably do fine since this is a giant company that can withstand sector-specific shocks. If you can wait until the price is more attractive, however, that’s an even better proposition.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
