Here's Why Shares in Chevron Slumped Today

Key Points
Higher crude oil prices and crack spreads are good news for Chevron.
The parties to the conflict are still far away from a comprehensive peace deal.
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Shares in integrated oil major Chevron (NYSE: CVX) declined by 5.3% by 11 a.m. today. There's no arguing over the reason: the 15% drop in oil prices as a consequence of the agreement for a two-week ceasefire between the U.S. and Iran.
Does the sell-off make sense?
Investors have been buying stocks like Chevron to hedge against the risk of a prolonged conflict and its impact on global energy prices. As such, when that risk recedes, as it appears to have done today, it's understandable if the market reacts by selling off oil and stocks like Chevron, which are bought as proxies for oil prices.
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End markets remain favorable.
Still, it's worth taking a step back and looking at the bigger picture here. The 15% drop in oil prices just means it's trading at about $95 per barrel at the time of writing, a significant premium to the $58 per barrel it traded at at the start of the year. That's good news for Chevron's upstream (exploration and production) interests.
Moreover, refining crack spreads (the difference between the price of crude oil and petroleum products like gasoline) remain elevated. For example, the 3-2-1 crack spread, which measures the difference between the costs of three barrels of crude, two of gasoline, and one of diesel, remains elevated at $42, up from less than $at the start of the year. That's good news for Chevron's downstream (refining margins).
The reality is that crude oil supplies and refined product supplies from the Persian Gulf will take time to recover to pre-conflict levels, if at all.
Where next for oil and Chevron
Furthermore, the agreement is a ceasefire, not a comprehensive peace deal, and many points in the official Iranian and widely reported U.S. versions are incompatible, particularly regarding the conditions for reopening the Strait of Hormuz and who will have long-term control over it. Until these matters are resolved, Chevron remains an excellent way to hedge risk in the current environment.
Should you buy stock in Chevron right now?
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.