Unusual Options Activity for Equinor (EQNR) Hardly Surprises Anyone

On Monday, shares of Norwegian energy giant Equinor (EQNR) swung higher to the tune of 4.4%, generating little surprise. With broader fundamental catalysts aligning favorably for petroleum-based businesses, it would have been more surprising if EQNR stock failed to provide a single-day return for stakeholders. Nevertheless, the narrative for hydrocarbon-related investments offered both opportunities and frustrations for market participants.

Earlier this year, Russia made the dangerous decision to invade neighboring Ukraine. In so doing, it completely disrupted modern principles of exhausting diplomacy before initiating military action. However, what made the resultant spike in hydrocarbon energy prices even more pernicious was inflation. With the Federal Reserve struggling to gently unwind the excesses of the new normal, the purchasing power of the dollar diminished substantially.

However, with the central bank committed to attacking inflation as its primary goal, it gradually gained traction toward its objective. As The Wall Street Journal reported near mid-September, U.S. gasoline prices fell for several weeks in a row. In turn, this meant that investments like EQNR stock, which previously ran higher on inflation and global instability forecasts, slipped sharply.

Recently, though, EQNR stock and its ilk seesawed back toward the northbound direction. With the Organization of the Petroleum Exporting Countries and its non-member allies – known as OPEC+ -- agreeing to meet in Vienna, Austria on Wednesday to discuss oil production cuts, hydrocarbon energy plays once again became relevant.

While the entire framework is cynical, for struggling investors, EQNR stock may represent one of the few bright spots in terms of upside speculation. Adding to the storyline, the company became the subject of unusual options activity.

EQNR Stock May Be Obvious But It’s Viable

Upon the ringing of the closing bell on Oct. 3, Equinor attracted intense interest among bullish traders. Market participants in the derivatives arena piled into $40 call options for EQNR stock. Calls rise in value as the underlying security moves higher in the open market. The aforementioned option featured an expiration date of April 21, 2023. That gives traders 199 days from the time of the order placement before the options become worthless.

Volume for the transaction reached 10,007 contracts against an open interest reading of 130. The bid-ask spread as represented by the midpoint price ($2.40) came out to 8.33%. Usually, market makers provide themselves with a safety margin for difficult-to-place trades, although in this case, the spread isn’t terrible considering the time to expiry.

EQNR stock closed at $34.57 in the open market. Therefore, the security needs to move up 15.7% to be at the money.

Predictably, the bullish outlook for EQNR stock aligns with the prevailing optimistic sentiment in the options market. According to data from Barchart.com, EQNR currently features a put/call open interest ratio of 0.35. Typically, the delineation point between bullishness and bearishness is 0.70, with figures below this level reflecting optimism (i.e. traders are buying more calls than puts).

However, what’s interesting to note is that Wall Street analysts have lukewarm views about EQNR stock. Three months ago, the consensus rating was a “hold.” In the current month, the overall rating has not changed.

A Politically Problematic Investment

Although the upside pathway should remain clear for EQNR stock – so long as cynical catalysts like geopolitical tensions remain largely in place – the broader framework presents political challenges.

For instance, with OPEC+ apparently on the verge of agreeing on production cuts, the move would represent a slap in the face to the Biden administration. As The New York Times mentioned, President Joe Biden visited Saudi Arabia in July to help spark negotiations about production increases. This meeting materialized despite sharp criticisms about the Saudi government’s human rights record.

Now, it appears that the president engaged in highly contentious talks for little to no benefit. In turn, such a development may bring geopolitical risks as it casts the U.S. in a weaker light.

For Equinor, the rise in its share price reflects that its petroleum business – as opposed to its renewable energy pivot – will keep the lights on for far longer than management initially anticipated. Moving forward, investors should be aware of possible political blowback risks.

Time for ‘Dirty’ Profits

Although hydrocarbon investments may not align with modern sympathies and strategies for a greener future, the harsh reality right now is that investors must focus on what works. So far, hydrocarbons enjoy significant demand, thus making EQNR stock intriguing – even if it is for the “wrong” reasons.

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