The Gap Between Oil and Chevron

Much has changed in a very short time, and at the center of today’s uncertainty is the price of oil. Energy touches nearly everything. The most obvious example is every time you fill up your car, but it extends well beyond that and is even used in ibuprofen and Tylenol. Naturally, it raises questions about where gas prices are headed and how higher energy costs might drive up broader inflation.

 

Inflation significantly above 2% can lead to a very challenging economy for both the Fed and politicians. Gasoline prices have already responded to higher oil prices. However, the real danger is assuming only a few weeks of data reveal an obvious outcome; the broader economy tends to react more slowly. Since oil is commanding so much attention, here’s an illustration of how difficult it is to predict what seems like a simple relationship.

 

 

 

What Looks Obvious Rarely Is

On February 26^th, oil traded at $65 per barrel and Chevron at $185. By Monday, March 3^rd, the first trading day after the Iran conflict began, oil climbed to $72, and Chevron rose to $189. That reaction made sense. Chevron is a major energy producer, and higher oil prices typically support higher earnings. But the relationship quickly becomes more complicated. A few days later, oil advanced to $74, yet Chevron slipped back to $186. Perhaps investors were disappointed that oil had not moved higher.

Then on March 6^th, oil bulls got their wish and oil spiked to $89. Stock investors were not rewarded; Chevron only returned to $189. This raises a natural question: if oil is $24 higher than it was at $65, why isn’t Chevron meaningfully above its earlier price? The simplest explanation is that investors viewed the surge as temporary and not a sustainable boost to Chevron’s long‑term earnings. Commodity prices are notoriously volatile. When supply is tight, and a buyer needs oil immediately, they pay whatever the market demands. But even this “simple” explanation quickly becomes more nuanced.

On March 12^th, oil jumped to $95, and Chevron responded as expected, rising to $198. Even this seemingly rational behavior was short-lived. On March 23^rd, oil fell $10 in a single day back to $89, while Chevron rose to $205. Investors seemed to have shifted their focus to the impact of the bombing on Middle East oil infrastructure. There are many lessons in this, but here are two important ones.

The Market Is Already Thinking Past Today

First, this is yet another reminder of how difficult it is to predict short‑term or long‑term price movements. Last year’s tariffs offered a similar lesson. They were expected to cause major economic disruptions, yet within months, the market recovered to new highs. Selling to avoid declines is dangerous because you must also decide when to buy back in—and that is usually far harder. Markets rarely turn higher on good news; they turn higher when the news still looks bad. By the time your confidence returns, prices have already risen.

Second, if Chevron eventually falls back to $165 as Middle East tensions stabilize, and you didn’t sell at $205, all is not lost. Consider that Chevron’s dividend is $7.12, and it has a long history of raising that dividend. Even without any increases, it takes less than six years of income to recover the $40 difference between $205 and $165. Your investment in Chevron is not solely dependent on price or selling at the “right time.” The company has a 38-year track record of steadily increasing its dividend. It has created shareholder wealth through both higher and lower energy prices. That is one of the core advantages of dividend‑growth investing.

Observations on the Market No. 417