Chesapeake Energy Corporation (NYSE: CHK) is having a rough day in the market today. While the company hasn’t released any news of its own, there’s a very good reason for the declines. The price of oil is falling, and there’s a strong correlation between the company and the commodity. Today, we’ll talk about:
- Why the price of oil is headed down and what it means for CHK;
- what we’re seeing from the stock;
- and what we’ll be watching for ahead
CHK Falls As Oil Starts To Decline
Oil has had a strong run in the market as of late, and we’ve seen some strong days out of Chesapeake Energy as a result. However, today is not one of those days. Today, oil is falling dramatically, and it’s bringing the stock along with it. So, why is oil falling? Well, there are a few reasons:
- US Oil Supplies Grew – News broke surrounding rude oil inventories in the United States. Last week, these oil inventories gained by 5.8 million barrels during the last week. At the same time, gasoline stockpiles climbed by 1.9 million barrels. The data from the Energy Information Administration led to concern as this isn’t normally the time of year that we see gains in stockpiles of oil and gas. In fact, that’s exactly the point Tariq Zahir, managing member at Tyche Capital Advisors was eluding to when he said “Normally, you don’t see builds at this time of year. With Memorial Day Weekend and summer driving season coming up, we are expecting a draw. And getting a build – and such a large build, was surprising.“
- OPEC Concerns – Another story that is helping to reduce the price of oil in today’s session, leading to the declines we’re seeing in CHK and others, has to do with OPEC, the world’s largest oil cartel. OPEC has had rules in place that limited the amount of production that came out of member countries. However, with the gains in the price of the commodity, many fear that OPEC will start to increase output. If this is the case, we could see declines.
- Iran – Finally, much of the gains that we’ve seen in oil as of late had to do with Iranian sanctions, limiting their oil from the majority of developed nations around the world. However, Iran seems like it’s ready to play ball, with a statement demanding that Europe buy its oil, it seems as though the country is open to negotiation that could open the floodgates for the OPEC’s third-largest producer. Of course, if this happens, oil prices would likely see heavy declines, yet another concern for CHK investors.
What We’re Seeing From The Stock
One of the first lessons that we learn when we start to dig into the market is that the news causes moves. In this particular case, while no news was released by Chesapeake Energy, the news surrounding oil is bad for the company. After all, oil is a core product of the company. Therefore, when oil prices are down, its ability to generate revenue and profit become limited. With the thought that oil may continue to fall, investors are concerned, sending the stock spiraling downward. Of course, our partners at Trade Ideas were the first to alert us to the declines. Currently (10:06), CHK is trading at $4.25 per share after a loss of $0.30 per share or 6.59% thus far today.
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What We’ll Be Watching For Ahead
Moving forward, the CNA Finance team will continue to keep a close eye on CHK. In particular, we’ll be watching the supply and demand metrics surrounding oil ahead. While we may see dips in the price of the commodity here and there, things are looking positive in the long term view. So, we believe that in the near term, we should see a recovery in oil prices and the stock. Iran may be ready to negotiate, but sanctions are likely here for a while. This combined with the fact that OPEC has a vested interest in supporting oil price growth, chances are that we’re not going to see a meaningful long term hindrance to price by increased supply anytime soon. Nonetheless, we’ll continue to follow the story closely and bring the news to you as it breaks!
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