Exxon Mobil Is Finally a Short Now That Oil Is Going to $200

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Shares of oil giant Exxon Mobil Corporation (NYSE:XOM) have been on quite a run lately. XOM stock rose for the eighth straight day on the heels of the rally in oil. It is trading at the highest levels since December 2016.

Exxon Mobil (XOM) logo outside of a corporate building
Source: Harry Green / Shutterstock.com

The experts and pundits are now predicting oil prices could go to $200 and even $300 per barrel. This is exactly the kind of talk that is typical at tops in the market. It is time to take a guardedly bearish stance on XOM over the coming weeks.

A recent headline from from Reuters played on fears that oil prices could hit $200 a barrel.

The headline below echoes a similar sentiment, except this headline is from a New York Times article dated May 21, 2008.

Oil prices peaked several weeks later back in 2008, well below the $200 level. In fact, they never even made it to $150 before collapsing to under $40 some six months later.

A collapse of that magnitude is unlikely this time around. When the headlines and fear mongering reach this level, though, it is usually a reliable contrarian indicator of an impending pullback. A flame out of the recent red-hot rally looms on the horizon.

It may not happen in a day, but it will inevitably happen. History shows that parabolic moves like we have seen in both oil and oil stocks never last. As Mark Twain said: “History doesn’t repeat itself, but it often rhymes.”

Higher oil prices lead to demand destruction. This means consumers find alternatives or cut back on use due to the high prices. Oil prices are reaching demand destruction levels according to ConocoPhillips (NYSE:COP) Chief Executive Officer Ryan Lance. I certainly value his opinion much more than a talking head who relies on sensationalism instead of professionalism.

Mr. Lance also talked about the impending increase in supply coming to the oil market over the next few weeks. This inevitable pick-up in production is also a hallmark of higher oil prices. The record backwardation in oil markets highlights how this future supply is expected to lead to lower prices by oil traders.

Technical Take

XOM stock is reaching historically overbought readings. The 9-day relative strength index (RSI) is back above 80. The moving average convergence divergence (MACD) has risen to extremes. Momentum is also rocketing higher. Shares are trading at a big premium to the 20-day moving average.


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More importantly, XOM stock had a spinning top candlestick formation yesterday. Shares opened higher and made a new high only to subsequently pullback sharply and close below the opening price of the day. This type of price action signals that the previous trend is beginning to weaken. The buyers may finally be exhausted and the sellers are starting to take control. It is an even more powerful indicator given the parabolic move of the prior rally in XOM stock.

Implied volatility (IV) is at the 100th percentile for XOM stock options. It means option prices have never been this expensive over the past 12 months. This favors incorporating some option selling when structuring trades.

So, to position for a pullback in XOM stock, a bearish put debit spread makes probabilistic sense. Buying puts outright is very expensive and shorting XOM stock is both risky and expensive. A defined risk option spread is much cheaper and less risky while still allowing for out-sized gains.

How to Trade XOM Stock Now

Buy XOM June $82.50 puts and sell XOM June $80 puts for a $1.00 net debit.

Maximum risk on the trade is $100 per spread. Maximum gain is $150 per spread if XOM closes below $80 at June expiration. Potential return on risk is 150%.

The trade is 6 deltas net short at inception. This equates to being short 6 shares of XOM stock. The trade structure allows selling of shorter-term put spreads to bring in additional credit to further reduce the initial net debit paid.

On the date of publication, Tim Biggam did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/exxon-mobil-is-finally-a-short-now-that-oil-is-going-to-200/.

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