With crude oil trading at the highs of the year, shares of Exxon Mobil Corporation (XOM) have followed suit and are trading at the highest level since last May. While the rally has certainly been impressive, I look for XOM to have trouble breaking past the $90 resistance level over the coming weeks.
As the chart shows, Exxon Mobil stock is approaching a significant resistance level at $90. XOM tried and failed to pierce this level two times last week.
A lot of the difficulty XOM stock is having in breaking out is likely due to the big premium that Exxon Mobil is trading to crude oil.
While oil has had a significant rally off the February lows, XOM stock (normally correlated to oil) has rallied even more sharply. Past divergences of this magnitude have inevitably reverted, with shares of XOM falling in relation to oil.
Interesting to note that when XOM was last trading at $90 in May 2015, oil prices were hovering around $60. With oil now still well below $50, it is evident that Exxon Mobil stock has likely gotten a little ahead of if itself at current levels.
Will Oil Outage Boost XOM Stock?
While short term the recent oil production outages due to sabotage in Nigeria have certainly been bullish for crude, longer term the picture continues to remain somewhat bearish. Goldman Sachs, Morgan Stanley and Barclays all look for the recent rally in crude to be staunched with additional supply coming on the market to fill the Nigerian shortfall.
Goldman feels that oil approaching $50 will lead to a pickup in exploration and production, while Morgan Stanley notes that the supply outages may not be sustainable. Barclays looks for reduced refinery margins to crimp demand.
Implied volatility (IV) of XOM options is at the lowest levels since last July, which is also a reliable contrarian bearish indicator. The last time IV was this complacent marked a significant top in Exxon Mobil shares.
Low levels of IV mean option prices are comparatively cheap, favoring long volatility trade structures. To position for a short term pull back in Exxon shares, a put calendar trade makes sense to me.
Specifically, I would look to buy the June $87.50 puts that expire June 17, and sell the May 27 $87.50 puts for a 65-cent net debit.
The maximum risk on the trade is $65 per spread, with the maximum gain achieved if XOM pulls back to the $87.50 level at May expiration.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
