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Chevron to Lose a Stripe

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For a firm that touts “The Power of Human Energy” as its tagline, Chevron Corp. (NYSE: CVX) has certainly not invested that human energy in its hedging operations — where they are supposed to manage the risk of an adverse move in crude oil. The NYSE-listed firm, which releases its quarterly earnings on May 1, today announced that earnings would be “sharply lower” due to falling oil and gas prices. Huh?

So while we endured peak oil prices, Chevron did little or nothing to lock in higher crude prices before they fell. Firms like Chevron are able to transfer their risk of falling crude oil prices in the futures market. That’s one of the reasons the futures markets exist — so producers can sell commodity future contracts against their expected inventory. Crude Oil is refined into other products such as gasoline and heating oil.

Refining Crude Oil

Refining Crude Oil

According to data from MF Global, Crude Oil futures for January delivery traded as high as $121; for February delivery as high as $108; and for March delivery as high as $70 per barrel – all the months of the Q1 2009.

CBS MarketWatch said “Chevron reported that the average price of crude had fallen 56% to $43.19 per barrel.” That may be true, but it does not annul Chevron’s responsibility to their shareholders to lock in higher sale prices via commodity contracts. Chevron knows how much crude they can produce — they can easily sell it forward and hedge at least part of their expected production and refining.

Chevron passed the higher costs of gasoline at the pump to me and you during peak oil. Now, their shareholders might take the hit as Chevron’s shares fall due to lower profit margins — the result of  unhedged crude oil inventory. Chevron’s shares closed up $0.75 during the day Thursday, but fell $1.99 in after-hours trading to close at $67.24.

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