Why Chevron Plunged 15% This Week
What happened
It's all fun and games until a recession looms on the horizon, and then it's look out below. Shares of Chevron (NYSE: CVX) fell 15.4% this week compared to where they closed out last Friday, according to data from S&P Global Market Intelligence, as economic decline looks increasingly likely.
If the economy contracts and people are put out of work, the demand for oil will weaken. The price of a barrel of oil plunged Friday as recessionary fears grew, outweighing the concerns over supplies from global geopolitical hostilities.
The price for West Texas Intermediate crude, Brent, and natural gas all tumbled around 5% for the day for July contracts.
Image source: Getty Images.
So what
The U.S. economy is rolling toward recession, and a survey of the nation's CFOs found none believed there was a chance one could be avoided. Inflation is at a 42-year high, gas is at all-time records, and the Federal Reserve hiked interest rates by the biggest amount in over two decades.
Chevron, though, is a global company, and energy and recessionary concerns in Europe and elsewhere are arguably even greater. Having become highly dependent on Russian oil, Europe finds itself at the whims of Vladimir Putin, who has been mercurial about continuing supplies after sanctions were imposed following his invasion of Ukraine.
Europe was then rocked by an explosion at a natural gas export facility in Louisiana, which will cut supplies for months (though it had the effect of lowering U.S. natural gas prices amid fear of a supply glut).
These worries are taking a toll on the oil and gas industry in general as BP, ExxonMobil, and Shell all fell around 14% for the week.
Now what
Energy prices are likely to stay elevated even if they have eased back now. There is little excess capacity to facilitate new production, and consumption really hasn't abated much. The Biden administration is considering handing out rebate cards for gas as a sop for the high prices we're seeing at the pump, but that will likely only exacerbate the problem.
Moreover, there are worries that if China's economy begins to grow again, it will absorb much of any oil that might be available. It's revealing the problems caused by global government policies against fossil fuels which have led to underinvestment in exploration and refining.
Chevron's stock and those of its peers have fallen, but there remains plenty of momentum to push their shares higher in the weeks and months ahead.
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Rich Duprey has positions in Chevron and ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
