Early this week, we saw a peculiar development. The May contract for West Texas Intermediate dropped nearly $38 below zero. Such a massive deterioration in demand obviously bodes poorly for oil firms like Chevron (NYSE:CVX). Once one of the most relevant names among blue-chip giants, Chevron stock is struggling for any kind of positive momentum.
Judging by recent action in the futures market, it’s going to have to wait much longer than many anticipated. Of course, a futures contract falling below zero doesn’t mean that you can pull up to your local gas station and get a free fill-up — although that would be sweet! Instead, it signals a complete lack of demand for the commodity at the time specified.
However, if that explanation gave you confidence toward Chevron stock, I’d urge you to reconsider your thesis. Not too long ago, the biggest headwind impacting the sector was the oil price war between Saudi Arabia and Russia. For a while, it seemed the bitter feud had no end in sight.
But when a production cut deal was inked between the two nations, along with other major oil exporters, some investors may have felt the temptation to jump aboard. However, as I explained in my story about Exxon Mobil (NYSE:XOM), I urged readers to ignore the deal.
What’s affecting Exxon Mobil and Chevron stock the most has very little to do with supply. Without demand, it frankly doesn’t matter how steep the production cuts are: they will never be enough.
Here are three other factors that indicate CVX is a sell at this juncture.
Plummeting Vehicle Sales Will Impede Chevron Stock
One silver lining regarding the deterioration of oil prices is that it shifts demand away from electric vehicles. Suddenly, you can find the best deals on cars armed with internal combustion engines. Furthermore, substantially cheaper gas prices limit the incentive to buy EVs.
However, for this narrative to work in favor of Chevron stock, the consumer economy must be fundamentally viable. As you know, that is nowhere near the case right now. Even several months from now, I don’t think the recovery trek would be robust enough to matter for CVX.
Although I knew that total vehicle sales would plummet in March, I was shocked to see how far they had dropped. In February, total vehicle sales numbered 17.2 million units. Last month, it totaled 11.7 million units, or a 32% decline. That’s the worst such decline since September 2009 when vehicle sales plunged 35.4% against the prior month.
Click to Enlarge
In other words, the automotive market has already hit a recession. Now the question for the sector is how long it will take to get out.
And looking at vehicle sales from a longer-term basis, I can’t help but feel we are headed toward the worst lows since the government has started keeping record. If that’s the case, I believe Chevron stock will see significantly volatility ahead.
Traffic Is Dead in the New Normal
If you’re a car enthusiast, you may actually be enjoying the government-mandated shutdowns. It’s a surreal experience driving down the freeway at the heart of what would be rush hour traffic. Although the cause is terrible, there are some aspects of the new normal I wish we could keep around.
Of course, I could do without the social unrest and general sense of unease. At the same time, I’d be lying if I said I didn’t enjoy breezing through traffic at any hour of the day.
Unfortunately, such serenity comes at a steep cost, especially if you’re in the oil industry. Because all those cars sitting at home means that no one is pumping any gas.
Personally, I can only guess how much real-time demand has been lost on America’s roadways. However, the New York Times utilized some of the best data analytics to indicate that Los Angeles traffic has moved approximately 50% to 70% faster during its busiest times. And it’s a similar tale in other parts of car crazy California.
All this suggests drivers are loving life right now, and that’s a big problem for oil investors. Some of the pictures and videos I’ve seen imply that traffic volume could be down as much as 80% in some areas. If that’s the case, the oil glut will continue, pressuring Chevron stock.
Consumer Sentiment Is Terminally Ill
Finally, one of the biggest concerns I have for Chevron stock is the complete erosion of consumer sentiment. From March to April, the consumer sentiment index dropped from 89.1 points to 71 points, a 20.3% loss. This is the worst month-to-month loss since the government has kept complete records.
Click to Enlarge
Although it’s an obvious point, this means that the performance drop exceeds that witnessed in the Great Recession. That’s something to really ponder, especially for those that believe in a V-shaped recovery. Is it possible that a hard stop to the economy could be cured like the flip of a switch?
To throw cold water on that thesis, more than 22 million Americans have filed for unemployment benefits. Several million more will join their ranks. With business after business failing, there’s just not enough capital to keep currently unaffected companies insulated indefinitely.
Logically, this adds even more pressure to Chevron stock as people sit at home, desperately trying to get through to their state’s unemployment office. Until we have a viable plan to get folks moving again, I don’t think this is the last we’ll see of negative oil prices.
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.
