Exxon Mobil (XOM) appears to have reached a strong support level. As it continues to trade within a certain range, there is a lot of opportunity for the stock as we enter the summer seasons when gas prices go up and so do oil stocks. As it has been moving sideways since mid January it has to break out eventually.
The move sideways has attempted to push against the '87.00' ceiling no less than seven times since January. The last two lows have been around 84.50 and this is a significant support level. A lot may depend upon its dividend. Exxon Mobil is one of the strongest dividend-paying stocks out there. Exxon Mobil recently raised its dividend by 21%, which makes its payout the largest in the world in total dollar terms. And Exxon Mobil still compares very well in relative terms, too. The stock should continue to outperform the market once the natural gas bear market is over.
Gas Prices Rise in Summer
Often it is summer when prices go up! Why is this? Companies actually use a different blend in the winter than they do in the summer. These seasonal blends of gas are due to a regulation from the EPA that started back in 1989. This regulation set a cap on vapor pressure in gasoline. The main reason for this regulation was to reduce pollution. Different oil refineries actually have to shut down temporarily to switch the whole refinery over to the new blend. And whenever a refinery shuts down there is a dip in the available supply of gasoline to the market. So thinking about basic economics, whenever the supply of a rather inelastic product goes down and demand is still high, prices will go up.
But, it may not be that easy this year! Recently, the Energy Department made a statement that gasoline will be less expensive this summer. This is better than previously expected because oil prices have recently dropped. The government said drivers would pay an average of $3.79 per gallon at the pump from April through September. That's a 16-cent decrease from last month's outlook and only 8 cents higher than last summer's average of $3.71 per gallon. The forecast reverses earlier warnings about a sharp rise in prices. The government said last month gas prices could rise to a monthly average of more than $4 a gallon.
The Options Play
Buy October 2012 call with a strike of '82.50 (priced at $3.90)
Sell October 2012 call with a strike of '85.00' (Priced at $2.64)
Net Debt to Start: $1.34
Maximum Profit: $1.16
Reasoning behind the Trade
Gas Prices usually rise in the summer. It may take longer but they will eventually go up again.
October gives us some leeway if gas prices continue down for a short period longer.