Chesapeake Energy (CHK) Stock: 40% Upside Can’t Happen In These Conditions


Chesapeake Energy Corporation (NYSE: CHK)

Chesapeake Energy Corporation has had an incredible time in the market as of late. The recent gains continued on Monday after analysts at SunTrust said that the company has an upside around 40%. However, the stock is declining in a big way today, and for good reason. It has to do with demand trends associated with oil. At the end of the day, the data released today could throw a big wrench in the prediction of 40% upside for the stock. Today, we’ll talk about the news, what we’re seeing from the stock as a result, and what we can expect to see from CHK moving forward.

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CHK Hit Hard By Oil Demand News

As mentioned above, Chesapeake Energy is having a rough day in the market today after data with regard to the demand for oil was released. Unfortunately, demand for the commodity has diminished in a big way. Growth in demand for oil in developed countries is now completely gone. We’re also seeing a massive slow down in Asian powerhouse economies like China and India.

As a result of the slowing, the IEA said that global oil demand growth has fallen apart in the third quarter of 2016. During the quarter, the IEA said that demand is expected to sink to 800,000 barrels per day in the quarter. This is a massive decline from the same quarter last year. In fact, the figure is about 1.5 million barrels lower! With oil being the flagship product at CHK, this is incredibly bad news.

The IEA report wasn’t the only hit to oil either. In fact, the Organization of the Petroleum Exporting Countries (OPEC) released a report on Monday. Unfortunately, that report was on the bearish side as well. In the report, a revision was made for non-OPEC supply to go upward by 180,000 barrels per day in 2017. So, regardless of if we are looking at the supply side from OPEC data or the demand side from IEA data, things aren’t looking good for oil. Just another dollop of icing on the cake that’s likely to lead to declines for CHK. With regard to the reports, Oliver Jakob, a member at Switzerland’s Petromatrix, had the following to say:

The two reports are going in the same direction, but from slightly different angles… IEA have been bearish on demand and OPEC on non-OPEC supply, but whichever way you look at this it means that the markets are going to take longer to balance than many predicted at the start of this year.”

What We’re Seeing From The Stock Today

As we know, when positive news is released with regard to a publicly-traded company, we can expect to see gains. However, the news that was released today was anything but positive. At the end of the day, CHK, as an oil producer is heavily exposed to spot market prices. With reducing demand and increasing supply around the world, things simply aren’t looking good. As a result, we’re seeing big declines in the value of the stock today. Currently (12:14), Chesapeake Energy shares are trading at $7.38 per share after a loss of $0.68 per share (8.39%).

What We Can Expect To See Moving Forward

While I would love to say that supply and demand will soon balance themselves out, that simply doesn’t seem to be the case. And we find CHK caught in between the two. At the end of the day, the declines aren’t the result of any wrongdoing by the company. It just happens to be in an industry that is on the decline and likely to fall further. Unfortunately, that’s bad news for the company and investors. All in all, I’m expecting to see declines on CHK ahead.

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