We have recently witnessed some of the highest oil prices history. The price of energy hasn’t reached these levels since 2014. The more expensive oil and gas prices are translating into increased operating expenses for many companies and in individuals who have become accustomed to low energy costs. The price of Brent Crude is hovering around $75 per barrel. And the West Texas Intermediate (WTI in the U.S.) is trading in New York just north of $68 per barrel. Regular gasoline in the U.S. is priced at $2.80 per gallon nationwide, which is 5 cents higher than last week, and up 40 cents from a year ago.
In the wake of rising oil prices, energy companies such as Chevron have been reporting record profits. Chevron (CVX) reported earnings of $1.90 per share in its latest quarter, compared with $1.48 forecast by Thomson Reuters. CVX is nearly 18% higher over the last year, recovering from a drop earlier this year. Chevron had some minor refining issues even in this latest quarter but overall it should continue to outperform over at least the short and medium term. The S&P500 index has beaten Chevron over the past 5 years. However Chevron has outpaced the stock market index in the last year, with strong momentum to push forward.
Analyst Bill Selesky at Argus Research reaffirms his BUY rating on Chevron with a price target of $130. He believes that Chevron “offers best-in-class production growth and the potential for strong free cash flow at a time when most peers are struggling to improve production and lower costs. The company has also recently completed several major capital projects, which should lead to reduced capital spending over the next several years. The company has a desirable mix of both long-cycle projects (Wheatstone and Gorgon) and short-cycle projects (Permian Basin) that should enable it to post strong earnings in a range of oil price environments. Chevron also pays a sizable dividend with a yield of about 4.5%. In recent conference calls, management has emphasized that maintaining or increasing the dividend is the company’s top priority.”
Higher oil prices is good news for giant oil companies but it could mean more pain for consumers at the pump.There is a knock on effect if the cost of energy becomes too costly. Companies that are hurt by the rising price of oil include American Airlines, 3M, UPS, and Caterpillar. These companies have to absorb higher input costs. This is why increasing oil prices, especially if it happens too fast, can cause a shock to the economy and slow it down. Generally speaking higher oil prices is bad for the U.S. economy because the oil sector is a much smaller segment of the economy than the other industries and consumers that use oil. Since the oil market has grown a lot over the past 4 years, the net effect of the price of oil has gotten smaller. But there is still uncertainty facing oil. Recently U.S. president Donald Trump came out to attack OPEC, which could shake up geo-political tensions.
Raghee Horner, a futures and currencies expert at Simpler Trading reassures investors that so far the price of oil isn’t high enough to destabilize the economy. She says that panic will only kick in if oil tops $80/barrel, or about 18% higher than today. But by the time oil reaches that level, maybe the economy will have grown large enough to withstand it. Due to the cyclical nature of energy stocks it is good to have some in an investment portfolio to counterbalance other types of stocks. Having the right balance is the best approach to face an uncertain future in the equity markets.
This author holds 30 shares of CVX as of writing this post.