How much of the recent Oil Tumble Could Explain Chevron’s fall?

Oil has tumbled down in recent weeks and in the process it dragged along with it many energy stock prices including the leading energy stock Chevron Corporation (CVX). Oil prices and by extension United States Oil (USO) has lost over 17% off its value in May and even in June (UTD) oil has declined by 4.7% (UTD). This downward trend might continue in oil prices in the weeks to follow and thus is likely to bring down energy stocks.  How much of this recent plunge in oil prices could explain the decline in Chevron’s stock price.

During last month Chevron’s stock has declined by nearly 7% and thus experienced its worst performing months in 2012. There are many reasons that could deconstruct the recent drop in oil prices including: the stable oil production of OPEC despite the tensions between Iran and the U.S; the recent news on this front is that U.S exempts India and Korea from oil sanctions; the rise in production in no-OPEC countries; the concerns regarding the debt crisis in Europe; a possibility of economic slowdown in U.S and China two of leading oil consumers. It is obvious that this decline in oil prices had a lot to do with the fall of Chevron’s stock. Let’s examine the relation between the two indexes:

The chart below presents the changes of the Chevron’s stock and oil price (C12 future) during 2012 up to date.

oil and CVX 2012 JUNE

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 price 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 that oil has a major part in determining the direction of Chevron’s and roughly explains 35% to 40% of the stock’s movement.

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Another way to consider the relation between oil price and Chevron is via oil’s effect on the company’s revenues. According to Chevron’s financial statement (2011) the ratio of its oil revenues out of the 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) that if oil price were to fall by another $5 off its value and reach nearly $80 mark, the stock of Chevron could decline by as much as $3.6 to $4 and reach nearly $96-$95 range.

Therefore I suspect the recent decline in oil prices has had a major effect on the movement of Chevron stock price and if oil will continue to trade down it would drag along with it Chevron by the approximate rate listed above.