Math ‘Tricks’ Won’t Save Chevron

Getting back to pre-pandemic levels is the real challenge for Chevron stock

Front and center on everyone’s mind is the novel coronavirus. Only now the emphasis has largely shifted from the health aspect to economic fears. Among the devastated industries, the oil market provided perhaps the biggest shock: at one point, prices dipped into negative territory. Naturally, the narrative for Chevron (NYSE:CVX) and Chevron stock has been clouded in pessimism.

At the same time, both domestic and international benchmarks for oil prices have rebounded significantly from this year’s lows. As a result, Chevron stock has enjoyed a huge bump up percentage-wise since the second half of March. Similarly, Chevron’s rivals, such as Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP) have benefited from the enthusiasm.

From the headlines, a conspicuous contributor is the soothing of tensions between Saudi Arabia and Russia. At the start of the global coronavirus impact, the two engaged in a bitter price war. Fortunately for the industry, cooler heads eventually prevailed, leading to OPEC nations and their allies hashing out an unprecedented production cut agreement.

Of course, a reduction in supply doesn’t mean much if there is no demand. But on this part of the equation as well, good news has started to filter in. Significantly, most states are now gradually relaxing their stay-at-home restrictions. As people get back to work, we should see an increase in demand for gasoline, which would help support Chevron stock.

Additionally, White House health advisor Dr. Anthony Fauci recently told CNBC that extending shelter-in-place orders for too long could cause “irreparable damage.” For someone who has appeared to contradict President Donald Trump’s eagerness to reopen the economy, this was a surprising take. Nevertheless, it’s a net positive for the oil industry.

Chevron Stock Must Overcome a Wall of Skepticism

Taking cues from the political front, it seems we’re finally getting consensus. We all knew where Trump stood from day one – well, sort of. But with Dr. Fauci seemingly onboard with the idea of reopening the economy (albeit responsibly), CVX stock appears like a viable play on a coming recovery.

However, I wouldn’t get too excited. Though the rise in oil prices – and subsequently Chevron stock – is impressive mathematically, we must also remember the context. Here, we’re talking about percentage gains from dramatically lowered thresholds. It’s getting back to a pre-pandemic normal and then making gains from there that’s the real challenge.

Whether consumer demand justifies the oil industry considering the challenge remains to be seen. So far, I’m not getting a good read. U.S. Travel Association President and CEO Roger Dow had some very blunt words in a recent news release, stating:

Our national economy is in a recession, but the travel industry is already in a depression…Travel-related businesses have been hit disproportionately hard by the pandemic’s fallout, and unfortunately our workforce is on the front lines of that struggle.

As NPR noted, “The uncertainty is so great, that for the first time in 20 years, AAA is not providing a forecast of how many people will be traveling over the Memorial Day weekend…” Personally, the stay-at-home orders have so messed up my schedule that I had to be reminded about the long weekend. I don’t think I’m the only one who had this experience.

If that wasn’t bad enough for Chevron stock, we don’t have a clear picture of when air travel will resume with some semblance of normal demand. According to Transportation Security Administration checkpoints, the agency screened 318,449 passengers on the Thursday before Memorial Day weekend, down 88% year-over-year.

The Labor Market Will Be the Decider

But if you really want to know where Chevron stock is headed, we only need to look at the obvious, the labor market. If people have jobs, they’ll either drive to work or take public transportation. As well, they’ll travel voluntarily for vacations and other personal functions. Without a robust labor force, you have problems.

However, what’s not obvious is the interpretation of labor market data. In the most recent count, nearly 39 million Americans filed for initial jobless claims over a nine-week period. But for the week ending May 16, 2.4 million filed for such aid. Thus, the number of initial claims has been declining for several consecutive weeks.

Still, you must remember that the big claims came early on in this crisis when the service sector – places of high contact like restaurants and movie theaters – shut down. Now, those businesses are starting to reopen across the country. But because initial jobless claims still number in the millions, that suggests higher-paid, white-collar workers are getting pink slipped.

If so, we could see another downturn in Chevron stock. Ultimately, with so many ugly variables to consider, investors should wait this market out.

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.