ConocoPhillips (COP): Betting Big on Energy Prices

• ConocoPhillips recently was the subject of unusual options activity with bullish implications.
• Enthusiasm for COP stock contradicts sentiment that has soured for the hydrocarbon industry.
• Fundamentals seem to support bullishness in COP, though caution is always warranted.

Easily the main symbol for the economic backdrop of the post-COVID new normal is the pain at the pump. According to data from the American Automobile Association, the national average for gasoline prices hit almost $5.02 a gallon, a remarkable tally. Of course, this figure means that many states are paying much higher rates to fuel their combustion-powered rides.

However, since hitting this dubiously notable milestone near mid-June, gas prices have substantially faded. According to a report from The Wall Street Journal published on July 8, prices have fallen for 24 straight days. Not surprisingly, the development represented a much-needed reprieve for struggling households.

No, prices remain substantially elevated against pre-pandemic norms so it’s not a blessing. Nevertheless, consumers will take what they can get.

Therefore, when the books were sealed for the July 8 trading session, several investors observed an oddity in Barchart.com’s screener for unusual options activity. Hydrocarbon energy specialist ConocoPhillips (COP) saw oddly robust activity, making traders excited but consumers nervous.

Fundamentally, one of the catalysts for lower gas prices is the release of crude oil from the U.S. Strategic Petroleum Reserve (SPR). Presumably, policymakers will be pressured to help the electorate, which doesn’t necessarily bode well for COP stock. Factor in recession fears – of which inflation is a contributor – and being long oil seems risky.

Nevertheless, the bigger picture may support the bold bet on ConocoPhillips.

Breaking Down the Trade for COP Stock

Following the close of the July 8 session, traders had moved into the $97.50 call options featuring an expiration date of Aug. 19, 2022. The closing price for COP stock was $86.46, meaning that the underlying security must increase nearly 13% for the trade to be in the money. That’s fairly aggressive when there are only 42 days till expiration.

As well, those 42 days are going against 24 consecutive days of gasoline price declines. Of course, the narrative can always change but it’s unlikely to do so on a dime. With the free market struggling to maintain $5.02, it remains to be seen if it will hold steady at $4.70, where it is at the time of this writing (July 9).

Perhaps this dynamic explains why the options activity for COP stock was unusual but not extremely so. Volume for the $97.50 calls amounted to 1,006 contracts against an open interest reading of 579. Throughout the year, investors have seen far greater spreads between volume and open interest.

Onto another point: the bid-ask spread as represented by the midpoint price ($1.83) is 6%. This isn’t the widest figure seen in the derivatives market nor is it the narrowest. Typically, narrower spreads reflect greater liquidity for the trade along with greater confidence among market makers to facilitate the transaction profitably.

Fundamentals Support ConocoPhillips

While drivers are finally seeing some (relative) relief at the pump, the WSJ in its aforementioned report stated that the respite could be temporary. Per AAA spokesman Andrew Gross in a statement to the Journal, “July is typically the heaviest month for demand as more Americans hit the road, so this trend of easing prices could be short-lived.”

Another factor that poses challenges for sustained lower gas prices – and by logical deduction, the bearish case for COP stock – is the unpredictable conflict in eastern Europe. Russia’s invasion of Ukraine has taken many twists and turns, each of them boding ominously for the stability of critical hydrocarbon supply flows for the world. An escalation in the fighting could eventually spike crude oil costs.

However, an element that perhaps few are appreciating at the moment is the release of oil from the SPR. While this move cynically provides political capital for embattled Democrats, the SPR is vital for the proper functioning of the U.S. during calamities.

If, for instance, inclement weather events such as hurricanes or other disasters force affected infrastructures to seek alternative energy channels, a greater-than-normal depletion of the SPR could spell serious economic problems.

Risky But Compelling

While all investors must perform due diligence with their targeted ventures, the concept of throwing some funds toward COP stock is fundamentally intriguing. Sure, gas prices are falling for now. However, the geopolitical backdrop along with the needed stability of the SPR suggests that crude oil prices could eventually resume their upward trajectory.

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