Exxon Mobil (XOM) Leads Energy Sector Higher

Long call options rising in open interest

After trending lower for the first half of the quarter, the energy sector has outperformed the wider market since the beginning of 2022. Part of this upward price action could be due to colder temperatures causing a higher demand for energy fueled heating. However, this price action could also be attributed to inflation-based sector rotation. The Exxon Mobil Corporation (XOM) share price has risen to an extreme high of a range based on historical volatility and pushed even higher after earnings, when the stock rose 6.4%.

Investors bid up the share prices after Exxon Mobil beat on earnings per share (EPS) expectations and despite revenue coming in lower than expected. Exxon Mobil reported $2.05 in EPS and $85 billion in revenue for the fiscal fourth quarter. Analysts had expected $1.95 in EPS and $90.8 billion in revenue. A key metric of net income for Exxon Mobil's upstream segment, which is one of the company's three main business segments and a strong indicator of overall success, came in lower than expected but was still the best performance in this area since Q4 2019.

Option traders appear to be placing bets implying that they think the recent upward price trend for Exxon Mobil will continue. That's because recent trading volumes favor calls over puts, while implied volatility and the open interest suggest that option traders have been buying upside calls while selling downside puts.

Since the beginning of 2022, Exxon Mobil stock has outperformed each of the top 10 holdings of State Street's Energy Sector ETF (XLE). This has been while the sector has outperformed the market as a whole, as investors have rotated into sectors positioned to benefit from inflation.

Key Takeaways

  • Traders and investors have bid up the share prices of Exxon Mobil stock after earnings.
  • The Exxon Mobil share price has recently traded at an extreme high of a historical volatility range.
  • The share price has recently closed above a thin zone of support based on volume.
  • The energy sector has outperformed the overall market since the beginning of 2022.
  • Exxon Mobil has led the sector over this time period.
  • Call and put open interest appears to be positioned for the price to rise for the near term.

Recent Energy Sector Performance

Exxon Mobil is the largest holding of XLE based on percent weighting, at 24%. The sector has greatly outperformed the market at large since the beginning of 2022, with XLE having gained 18% in this time frame, while State Street's S&P 500 Index ETF (SPY) has fallen 6.5%. The chart below illustrates the recent performance of Exxon Mobil and XLE compared to nine of the top sectors of the S&P 500.

XOM and XLE compared to nine of the top sectors of the S&P 500

It's notable on this chart that sector rotation appears to show that investors are positioning themselves to be prepared for the increase of interest rates to combat inflation. The top performing sectors—XLE, consumer Staples (XLP), financials (XLF), and utilities (XLU)—are considered relatively "safer" bets during times of rising inflation and interest rates.

The worst performing stocks—technology (XLK) and consumer discretionary (XLY)—typically underperform during times of high inflation—technology because of the drag of interest rates on companies with high amounts of debt, and consumer discretionary because of the assumption that consumers' buying power will be thinned, thus spending less money on wants as opposed to needs. The movement of funds could be traders and investors anticipating the next state of the economic cycle.

Inside the Energy Sector

The energy sector is a category of stocks that relate to producing or supplying energy. This sector includes companies involved with the exploration and development of oil or gas reserves, oil and gas drilling, and refining. The energy industry also includes integrated power utility companies such as renewable energy and coal.

The relative returns of the energy sector have been positively correlated to inflation every single time. As energy is considered a "need" more so than a "want," this sector tends to outperform during times of inflation because, as consumer spending shrinks across other sectors, the energy sector remains consistent.

The chart below compares the recent performance of Exxon Mobil stock with the top holdings of State Street's Energy Sector ETF (XLE) and S&P 500 Index ETF (SPY).

XOM with the top holdings of XLE and SPY

This chart helps to highlight how, since the beginning of 2022, individual stocks in this sector have been on the rise and greatly outperformed the market. In fact, the worst performing stock on this chart, Valero Energy Corporation (VLO), has posted a 10.3% gain year to date, while SPY has fallen 6.5%. Exxon Mobil could be leading the charge to the upside as it is the largest stock by market capitalization, and both oil and natural gas have been on the rise.

Price Action

An analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward Exxon Mobil stock after earnings. The chart below depicts the recent price action for the Exxon Mobil share price as of Thursday, Feb. 3.

Recent price action for XOM

The chart illustrates how the Exxon Mobil share price remained in a downward channel since the energy giant reported earnings for the prior quarter, highlighted in blue. Almost on cue, the Exxon Mobil share price rose above its 20-day moving average at the beginning of 2022, and it has remained in an upward trend near the extreme high of the volatility range through earnings. This trend is highlighted by the green arrow.

The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for Exxon Mobil stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing. It's notable that these bands widened in early December and narrowed to start the year, only having widened again as earnings approached.

Although Exxon Mobil missed on revenue on the whole and upstream segment net income expectations, investors bought shares of Exxon Mobil stock after the company reported earnings, as the stock gained 6.4% and set a new 52-week high. The share price remains at the top of the volatility range.

Volume Profile and Option Activity

A comparison between price action and option trading can provide insight into the sentiment of traders and investors toward a company's performance in the near future. However, further context of price action in terms of volume could illustrate areas of support or resistance, which could provide context to option open interest. The chart below illustrates the recent price action of Exxon Mobil, in addition to a price-based volume pattern on the left-hand side.

Price action of XOM with a price-based volume pattern

This price-based volume pattern depicts the prices where investors have bought and sold the shares previously. A noticeable amount of buying in the past often implies that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling any further. When volumes at a given price are low or nonexistent, it implies that few, if any, investors have the need to defend their positions at these levels.

This chart highlights how the Exxon Mobil earnings-based share price increase rose through a thin zone of buying volume, highlighted by the green rectangle. There has been a mixture of buying and selling above this zone, and recent trading prices have flirted with this area. This zone could become a new area of support, as buyers may wish to defend their positions at these prices.

Option traders appear to be positioning themselves for the upward price trend to continue in the near term. Recent trading volumes on Thursday, Feb. 3, featured 101,000 calls compared to 61,000 puts. The open interest likewise skews bullish, featuring 682,000 calls compared to 607,000 puts. While these figures are relatively bullish, there is not a large disparity between calls and puts. Further analysis is required.

Feb. 18, the next monthly option expiration date, features 125,000 calls against 82,000 puts in the open interest. The single option with the highest open interest is the $80 call, with 20,000. While this suggests limited upside to the current Exxon Mobil share price, the next highest open interest for this expiration date is the $85 call with 18,000. This represents 6% upside to the current share price.

Implied volatility also paints a further picture on this open interest. Implied volatility for upside calls is rising while the open interest is rising, suggesting that option traders are taking long positions in these options. Conversely, implied volatility for downside puts is falling as the open interest is rising, indicating that traders are selling these options.

Wrapping Up

The Exxon Mobil share price continues to move higher after the company reported earnings, despite missing on revenue expectations. The energy sector as a whole has outperformed the market since the beginning of 2022, as investors appear to be rotating into sectors positioned to prosper from an inflationary environment. Option traders appear to believe that the upward movement for Exxon Mobil will continue, as traders are selling downside put options while buying upside calls.