Is Chevron a Buy, Sell, or Hold at $110 Oil?

Oil prices have risen sharply due to the war with Iran. Brent oil, the global benchmark, recently traded above $110 a barrel amid continued supply disruptions in the Middle East. The price of Brent has surged nearly 90% this year.

Here is a look at whether investors should buy, sell, or hold Chevron (NYSE: CVX) stock, given the current price of crude oil.

Image source: The Motley Fool.

How oil prices impact Chevron

Chevron is one of the largest and lowest-cost producers in the oil sector. The company can generate enough cash to cover its capital program and dividend at less than $50 a barrel through 2030. With crude prices currently double that level, Chevron is producing significant surplus free cash flow.

The company initially estimated that it would produce an incremental $12.5 billion in free cash flow this year if oil averaged $70 a barrel, fueled by recently completed expansion projects, its acquisition of Hess, and cost-savings initiatives. It should generate significantly more free cash flow this year if oil prices remain elevated.

However, the company isn't yet experiencing the full impact of higher prices. During the first quarter, Chevron's profits fell despite higher oil prices and production. That was due to timing mismatches related to financial derivatives on products it hasn't yet delivered. Its earnings and cash flow will improve as it delivers those products in the future, assuming oil prices remain elevated. Chevron estimates that every $1 increase in the average annual price of Brent crude will boost its full-year cash flow by $600 million.

What's the outlook for oil prices?

While oil prices have soared during the first half of this year, there's a lot of uncertainty about where they will be in the second half. There's currently a stalemate in peace talks between the U.S. and Iran, which is prolonging the closure of the Strait of Hormuz. The longer it remains closed, the higher oil prices could go.

For example, JPMorgan recently warned that Brent could spike to the $120-$130 a barrel range in the near term, with the risk of surging to about $150 if the Strait remains disrupted through mid-May. Under this scenario, oil would remain above $100 a barrel in the second quarter before declining in the second half as oil flows normalize and inventory levels rebuild. Goldman Sachs also recently raised its oil price forecast for this year. Its base case is that Brent will average $90 a barrel in the fourth quarter. That's due to its expectation that oil flows through the Strait of Hormuz won't normalize until the end of June. Meanwhile, a more adverse case projects that oil could remain above $100 through the rest of the year.

While most forecasters now expect that oil prices will remain high for the rest of the year, they anticipate lower prices in 2027 and beyond. For example, the U.S. Energy Information Administration's latest short-term energy outlook estimates that Brent will average $96 in 2026 and $76 next year. Oil could head even lower in the coming years as the UAE ramps up production now that it has left OPEC.

Why Chevron stock is a buy at $110 oil

While oil prices have soared this year, Chevron's stock has risen more modestly at about 25%. Investors seem to be pricing in a quick recovery of oil supplies once the Strait of Hormuz reopens, and a more rapid descent in crude prices later this year. While that's entirely possible, there's meaningful upside risk to crude prices if the war reignites and the Strait remains closed.

Meanwhile, even if the current market expectations play out, Chevron can still thrive at lower oil prices. It expects to grow its free cash flow at a more than 10% annual rate through 2030 at $70 oil, while fully funding its capital spending and dividend at sub-$50 oil. Chevron's upside potential to higher prices and ability to thrive if they fall make the oil stock a buy at $110 oil.

JPMorgan Chase is an advertising partner of Motley Fool Money. Matt DiLallo has positions in Chevron and JPMorgan Chase. The Motley Fool has positions in and recommends Chevron, Goldman Sachs Group, and JPMorgan Chase. The Motley Fool has a disclosure policy.