What is the Effect of Oil on Chevron?
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The price of oil has plunged in recent weeks and in the process dragged along with it many energy stocks such as Chevron Corporation (CVX). During May, the oil price and United States Oil (USO) fell by over 17%(each) ; during June (UTD) oil has declined by 4.7% (UTD). This downward trend in oil price might continue in the following weeks. In such a case oil is likely to adversely affect Chevron's stock price. How did the recent plunge in oil price affect Chevron’s stock price? How will another fall in the price of oil affect Chevron?
During last month, Chevron’s stock declined by nearly 7% and thus presented one of its worst performing months in 2012. During May, the oil price (WTI spot) fell by 17%. There are many factors that could explain the recent drop in oil prices including: OPEC's ongoing stable oil production despite the tensions between Iran and the U.S; the rise in non-OPEC countries' oil production; the concerns regarding the debt crisis in Europe; and the possibility of an economic slowdown in U.S and China - two of the leading countries in oil consumption. It is obvious that the recent decline in oil prices adversely affected Chevron’s stock. Let’s examine the relation between the two indexes:
The chart below presents the changes in Chevron’s stock and oil's price (C12 future) during 2012 up to date.
As seen in the chart, both prices are strongly correlated. Between 2011 and 2012 the linear correlation between the daily percent changes of WTI oil (C12 future) and Chevron’s stock price was 0.59, which is a very strong and robust relation. This means the volatility of oil might explain nearly 35% of Chevron‘s stock volatility in 2011. During 2012, the linear correlation was slightly higher at 0.62, which means oil prices could explain nearly 40% of Chevron’s stock volatility.
This high rate means oil has a substantial part in determining the direction of Chevron’s stock and could roughly explain 35% to 40% of the stock’s movement.
Another way to consider the relationship between oil and Chevron is via oil's effect on the company's revenues. According to Chevron’s financial statement (2011) the ratio of Chevron’s oil revenues out of its total revenues was over 47%. This means the share of oil sales out of the total revenues seems to coincide with the linear correlation between the stock and oil prices.
Assuming a linear relation between oil and the stock price, this could mean (assuming all things equal) if oil were to fall by another $5 from its current price and reach nearly $80, the stock of Chevron could decline by as much as $3.60 to $4 and settle at the $96-$95 range.
Therefore I suspect the recent decline in oil prices has had a major effect on the movement of Chevron's stock price and if oil will continue to trade down it should drag along with it Chevron by the approximate rate listed above.
This article on Chevron and Oil was first published
For further Reading: Will Oil Prices Continue to Fall?
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