Exxon Mobil (XOM) Makes a Strange Case for Unusual Options Activity

Based on the full breadth of fundamental factors, investors arguably should be bullish on hydrocarbon giants like Exxon Mobil (XOM). With geopolitical flashpoints siphoning access to critical resources, XOM stock should cynically rise so long as the new paradigm shift remains in place. Since most evidence suggests this will be the case, the upside narrative for crude oil firms makes the most sense. However, recent trading activity suggests otherwise.

It raises a serious question – what factors would inspire a negative take on XOM stock, whether near term or longer? What makes the inquiry more pressing is that crude oil prices jumped during the Oct. 5 session. On Wednesday, OPEC+, which comprises the oil cartel and its non-member allies, agreed to cut oil production by two million barrels per day (bpd).

As Barchart contributor Rich Asplund mentioned, the cuts came in greater than initially expected. While this framework points to pain at the pump for consumers, for stakeholders of XOM stock, the matter should be a boon. Exxon Mobil closed the midweek session up slightly more than 4%.

However, the other dynamic to consider is the Federal Reserve. A few weeks ago, the central bank generated global headlines when it announced a benchmark interest rate hike of 0.75%. This represented the third time that the Fed hiked rates by this magnitude in response to skyrocketing inflation.

It’s possible, then, that some traders anticipate that the hawkish monetary policy shift will override the implications of geopolitical flashpoints and the OPEC+ production cut. However, on a net basis, it’s probably best to continue to assume that XOM stock will gradually rise higher in the years ahead.

Bearish Traders Shine the Spotlight on XOM Stock

After the closing bell rang out on the Oct. 5 session, XOM stock found itself the subject of unusual options activity. Specifically, bearish traders moved in on the $97 put options featuring an expiration date of Oct. 14, 2022. Puts rise in value as the underlying security declines in the open market.

Volume for this trade reached 11,519 contracts against an open interest reading of 171. The bid-ask spread as represented by the midpoint price ($1.54) came out to 3.89%. Typically, narrower spreads indicate greater liquidity. As well, easier-to-place transactions allow market makers to tighten their margins, thus making the trading opportunity more competitive.

To note, XOM stock closed at $99.12 in the open market on Wednesday. Therefore, shares must decline 2.14% to be at the money.

Interestingly, though, the bearish implication of the Exxon puts aligns with the predominant sentiment in the options market. According to data from Barchart.com, the put/call open interest ratio for XOM stands at 0.82. Generally speaking, the delineation between bullish and bearish sentiment is around 0.70, with figures higher than this level indicating pessimism (i.e. more people are buying puts than calls).

Now, it’s not overwhelmingly bearish but price action patterns indicate traders have been more pessimistic about XOM stock than anything else.

Regarding analyst assessments, Exxon Mobil features a consensus “moderate buy” rating. Although analysts have become more bullish on XOM stock compared to three months ago, the delta isn’t that significant.

Inelastic Demand May Represent the Arbiter

To be fair, another factor that could hurt XOM stock – and therefore justify the bearish take on the underlying company – is a global recession. Per The World Bank, this notion of an overarching downturn isn’t out of the realm of possibility.

Still, with supply disruptions stemming from international conflict and geopolitical rumblings, even a recession might not be enough to offset the cynical catalyst for XOM stock and its ilk. That’s because hydrocarbon specialists still leverage inelastic demand at the baseline of consumption.

Obviously, pricing generally affects consumer behaviors. However, when it comes to critical goods and services such as energy, people must utilize the bare minimum to achieve their necessary objectives; in this case, to go from point A to point B.

Moreover, should a global recession threaten commercial activity, the work-from-home phenomenon will almost surely evaporate. Desperate employees eager to show their boss that they’re top contributors will give up their privileges to secure a steady stream of paychecks.

You don’t have to be a psychologist to understand that existential crises will drive people to extreme ends. And when work from home evaporates, this will translate to previously dormant vehicles pouring onto the roadways. In turn, this pivot should help XOM stock.

No Need for Contrarianism

In some cases, going the contrarian route can lead to incredible profits. But for XOM stock, I just don’t see it. Supply of critical commodities is effectively being cut off. Ultimately, this should raise demand, irrespective of other economic forces.

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