Even though we have been facing slow economic growth and falling future prices for gas and oil, the energy sector as a whole (XLE) saw prices rise as the Government unleashed the QE3. Can Exxon Mobil (XOM) the stock continue to maintain its upward pace with the economy the way it is?
Stalling growth has its grasps in energy right now. Excess supplies and dwindling demand makes it hard for the sector and oil companies like Exxon to maintain its present move up. Analysts now think income from the oil & gas sector will fall 24% for the three months ending in September. That decline would be the biggest decrease in three years.
But Exxon is also wheeling and dealing right now with some very good moves for the future. Its recent agreement to purchase 196,000 acres from Denbury Resources ((DNR) in Bakken Shale oil will increase long term oil output substantially.
And besides, the third quarter is over and we have seen oil prices increasing as of late. Crude oil is still 20% higher than its nine-month low in June and natural gas is 60% higher since its 10-year low in April. And all this is expected to help the energy sector to see a slight gain in profits for the fourth quarter while other sectors are expecting decreases. This is good for long-term investing but may not help in the short term. In this third quarter reporting, numbers will come out in this earnings season and since it is not expected to be good, energy prices will see a reactionary drop.
But a combination of higher prices and lowered drilling should continue to lift oil prices through early 2013. But right now, a decrease in crude oil stocks reported by the U.S. Energy Department, meanwhile, could be a sign of a rough future for energy markets.
Exxon Mobil has been on a tear since June with a slight slowdown in early September but it is still moving strong. After a small spike through the upper Bollinger Band in mid-September, it has moved sideways with a slight bullish lean. But it still looks strong as it has bounced off the middle band for support. The RSI indicator has consistently supported the strong move up and is no different. The line remains clearly above the '50' mark which is important to the strength of the move. The MACD also remains well above the '0' level and supports the move just like the RSI. Using these indicators, I often look for signs of a slowdown, but in this case I cannot see one.
The Options Play
While the stock continues to rise, I am wrestling with one of two things. Should I play the trend or should I play a leveling off and possible lowering of the stock with the fourth quarter numbers coming in soon? Projections are not supposed to be good for anyone. I find playing a trend is much more beneficial than being contrarian. But in this case, I cannot deny what I will should occur by the numbers because of the low energy prices in the third quarter. If I play this contrarian and bearish., I am going to have to play it longer-term and give it time to reach my lower price target. Since it is moving up now, it may not turn right away.
- Buy an April 2013 call with a strike of '92.50' (priced at $3.85)
- Sell an April 2013 call with a strike of '95.00' (priced at $2.61)
- Net Debit to start: $1.24
- Maximum Profit: $1.26
- Maximum Risk: net debit
- Maximum length of trade: 7 months
Reasoning behind the Trade
- I do not believe the present trend will last much longer
- Third quarter numbers should send the stock down