It’s rare to see oil stocks rally like high-flying tech stocks. That’s what happened to Exxon Mobil (NYSE:XOM) stock since last October. It double-bottomed then and rallied 100% into its March highs. The moral of the story today is to use caution at these levels. This is not an obvious point of entry and let me explain my skepticism.
At the heart of the matter is the future of oil use. For the last two years, the biggest money managers on the planet committed to ESG investing. The whole world is on a crusade to end our dependency on fossil fuels.
The novel coronavirus pandemic pushed that movement forward by a lot. Humanity has developed new habits and most of them include moving less often.
The TSA screenings, for example, still show us down 40% to current levels from 2019. We are recovering, and the improvement over last year is almost 900%. But we’re still not flying half as much as before Covid-19.
The World Has Changed
Moreover people are working from home indefinitely. That is a huge drop in the demand for commuter gas use. More meetings have gone to cyberspace and they’re not coming back. It’s just that much more efficient. Companies have cut expenses in those areas tremendously and they won’t revert back to exorbitance.
Add to it the onslaught of electric-vehicle vehicle production, and you get a massive wave attacking demand on oil. This is all to say that the commodity that Exxon trades is under threat of dwindling demand. This is a trend, not a fad, so it’s not going to revert.
The price of oil also has downside pressure because the competition to supply whatever demand is left is fierce. OPEC nations need the income to sustain their socioeconomic programs. They will do whatever it takes to retain a high market share. This means they have to keep a lid on oil prices. Otherwise, the West will produce more of it if priced above $60 per barrel.
XOM stock so far has done really well, most likely because of the dividend it pays. With a reward of 6.2%, it’s hard to resist, especially that there is no fixed-income anywhere else. The central banks actions across the globe have decimated interest reward. Other than the United States, major bond markets carry negative yields.
No Longer Bullish on XOM Stock
This is what drove me to be bullish on XOM stock last year when it wasn’t popular. Being ahead of the curve is important, and that’s an important point today. Following the bullish herd now is risky. I’ve been more favorable than not, even last fall just days before it bottomed. But it is no longer as clear an idea now, especially that everyone’s hip to it.
Technically speaking, it needs a 10% correction before it is interesting again. XOM stock would make for a better buy closer to $50 then $60. From a pure trading perspective, fast investors could also chase it above $63 per share but only for a trade. XOM stock still has to recover it’s pandemic cliff. So it could still have room to go from that perspective.
If I have profits coming from last year, this would be my exit and wait for more progress. The dividend is attractive so the stock owners should have good conviction. Those who want to hold it through thick and thin should carefully consider selling covered calls. This would create synthetic dividends. This is a viable strategy for those who don’t mind selling their shares even higher.
Dividend Sanctity Is Prime
This is all based on the company promises that it will defend the dividend at all costs. If, for whatever reason, in the future their cash flow slows down, this could become a problem. It isn’t one yet but it would have a devastating impact on the stock price. Investors need to monitor the cash-flow situation very closely. The minute the conversation steers to dividend viability, the stock will suffer fast.
Between this and Chevron (NYSE:CVX), I’ve historically favored trading CVX stock instead. Except in this case, XOM pays the higher dividend yield. It also still has the most to make up to recover February 2020 debacle levels. If you force me to either buy or sell XOM stock now, I would sell it. However, I would not short it as a trade because the TINA acronym works for it even better than it does for U.S. bonds.
There’s also extrinsic factor from the market itself. Equities have never been higher, so they could be vulnerable to small corrections. I’m not calling for an outright crash because the U.S. government is just pouring too much cash into the economy. Investors need to remember to book profits often and not overstay their welcome in winning trades.
Coming into the pandemic crash XOM stock loses its investment appeal.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
