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Economy, Stocks  | December 21, 2018

Bear markets are never fun, but the deflated environment provides brave investors with tremendous buying opportunities. If this was a “normal” correction, I’d definitely consider buying Chevron (NYSE:CVX) stock.

Like other energy blue chips, Chevron stock provides long-term stability at a great value. Plus, it pays a generous dividend at a time when passive income is still at a premium.

The obvious compelling factor for CVX is its suddenly discounted price tag. At the beginning of this month, Chevron stock was holding up well relative to the oil market. While both West Texas Intermediate and Brent Crude fell off a cliff, the oil giant generally maintained a steady course.

But within a matter of days, Chevron stock crumbled. For the month, the shares are down by more than 10%. In 2018, the company is staring at a 17% loss.

However, volatility alone doesn’t mean that a stock is a good contrarian pick. But in addition to the decline of CVX stock, the company reported strong third-quarter results.The company delivered  earnings per share of $2.11 against a consensus estimate of $2.06. Its EPS rose 2.4% year-over-year Additionally, its top line came in at $44 billion, handily beating analysts’ consensus outlook of $42.8 billion.

With such metrics, you can reasonably assume that the CVX stock price will move higher over the long run. Again, under normal circumstances, I’d agree with that assessment. However, three headwinds give me pause.

A Worrying Drop in Oil Prices

As I previously mentioned, Chevron stock, along with rivals like Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B), have weathered the volatility of the oil markets. relatively well However, I must openly wonder how long the shares can hold their own.

The swiftness and severity of the recent oil price decline is what makes the stocks’ outlook questionable. Brent Crude has hemorrhaged nearly 31% of its value since October’s opening price. West Texas has tanked even more heavily, shedding over 34%. We haven’t seen such accelerated losses since the doldrums of late 2015.

Just as critically, the bulls have not responded in a confident manner. 

You don’t have to be a technical analyst or even believe in the technical approach to see this. For instance, after suffering steep losses between October and late November, the bulls only managed to move oil prices sideways.

That indicates to me that we have a demand crisis. Irrespective of whatever is going on in the world, consumers just don’t want to use oil. Therefore, we may endure deflation for quite some time, which doesn’t help CVX stock.

Chevron Stock Faces Sustainability Concerns

Chevron stock has an obvious advantage over most other equity investments: its strong 4.2% dividend yield. Better yet, the company has a history of consistent payouts. Based on its track record and robust fundamentals, this trend should continue.

Chevron’s new CEO, Michael Wirth, is another reason to be bullish on CVX stock. Wirth has mostly worked in the company’s downstream business. This segment utilizes cost controls to maximize its margins. And unlike Exxon Mobil, CVX wants to ensure that it continues to consistently pay its dividend.

Wirth has previously emphasized that Chevron’s fiscal discipline enabled it to survive $50 per barrel oil prices. He’s now trying to thrive at the same price point.

Back when Wirth talked about surviving $50 oil prices, they hovered around the $70 level. Now they’re below $50 and given the lack of bullish enthusiasm, they’ll probably fall further.

If oil remains below $50 for an extended period, CVX must find other ways besides cash flow to fund its dividends. Another issue is that the downstream-heavy company has sacrificed the growth potential of its upstream business.

If CVX can’t thrive with oil prices under $50, investors may abandon Chevron stock in favor of industries that are not levered to volatile commodities.

Parallels with 2014

Four-and-a-half years ago, the oil markets suffered a paradigm-shattering drop. One of the central factors in the decline was Russian military aggression. The country’s illegal annexation of Crimea sparked international outrage, eventually leading to U.S.-backed economic sanctions.

Now, amid another sharp decline of oil prices, a familiar face has again wreaked havoc in the West: Russia.

The parallels are quite eerie. Now, like then, a conflict between Russia and Ukraine threatens to boil over. Kiev recently announced that it would send warships to confront the Russian navy in the Sea of Azov. This is a tinderbox that could easily escalate into bloodshed.

Not only that, but the Russians made a dangerously arrogant move, flying strategic bombers to Venezuela. It’s a not-so-subtle message that they can move their military to our backyard.

Surely, not even the Trump administration can take this insult lying down. As a result, I think the U.S. will once again impose more painful sanctions on Russia, creating more uncertainty in the intermediate term for Chevron stock.

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