Exxon Mobil (XOM) has risen substantially as it has mirrored the rise in oil prices. While it is perplexing why oil has risen like it has, I still believe XOM is not done going up with the price of oil -- at least for the short term. Let's explore speculations as to why oil prices have risen and then I'd like to advise a short term income play using Exxon Mobil as it continues to move up.
Why is Oil Rising While The Global Economy is Slowing?
There are plenty of logical reasons why oil shouldn't be going up in price. Libya's civil war was a concern but it is over. We have a deepening eurozone problem that just won't seem to go away and both the U.S. and China have sluggish economies. These are not reasons to see oil prices increase right now.
Yet OPEC pumped 2.1 million bpd more than what it projected between April and June. This production level is the highest over production since 1998. Crude futures are up 30% off the low for this year and presently selling over $115 a barrel. The Centre for Global Energy projected oil to be $93 per barrel by September and $89 by year's end. So why has it risen? Let's consider a few events that may have influenced the move up in price:
Fears of the disruption of Middle East supplies because of the latest rhetoric between Iran and Israel.
- That's 3 million bpd lost from Iran if war develops.
- Anticipation of monetary easing by the U.S. and Europe.
- China is procuring more oil than it needs.
These are just a few speculations of why prices may have risen so quickly lately. Yet in reality, we have lower demand and a higher supply. This will eventually have to weigh in on prices again. I find it difficult to understand how prices could remain at this level too long if the global economy continues to stagnate and no global event threatening oil supplies manifests.
I see the value of oil company stocks going back down in the long run but in the short term, I think momentum will carry them up. If I would try to create an income play right now, I would go short term bullish.
Technically Speaking
Since the beginning of August, the stock broke through a very strong 86.8 resistance level and has not looked back since. We can tell how strong the move up is by looking at the Bollinger Bands. On its initial journey up in the beginning of July it used the middle band as resistance. This in itself is a sign of a very strong move. But since May it has been hugging the top band and this is even stronger. The RSI supports the strength of the move as it uses the "0" line as support. The MACD is also supportive as its MA's continue to move up. The MACD Histogram also has a consistent bullish pattern. All in all, the bullish move continues to look very strong. As it continues to move up, we can also observe a rising wedge pattern. Usually these are seen in a bearish trend and have a 70% chance of breaking out in a bearish pattern. But in this case, the stock has been moving sideways and finally dipped this spring. I would not consider a bearish breakout at this point just because of the direction the stock has taken.
(Click to enlarge)
The Options Play
Presently trading at 88.40, I believe the stock is short term bullish and long term bearish. But I intend to make a bullish short term play using options with a Bull Call Spread strategy. I will buy the first one (in the money).
- Buy an October 2012 call with a strike of "87.50" (priced at $2.65)
- Sell an October 2012 call with a strike of "90.00" (priced at $1.30)
- Net Debit to Start: $1.35
- Maximum Profit: $1.15
- Maximum Risk: net debit
- Maximum Length of Trade: 2 months
Reasoning behind the Trade
- Bullish trend is still strong, follow the momentum.
- Short term oil prices will keep rising.
