Exxon Mobil and BP: A Pair Trade on Big Oil

While speaking to reporters at the White House on Monday, President Biden threatened to increase taxes on U.S. oil companies. Biden referred to the oil companies as “war profiteers” and said they’d “pay a higher tax on their excess profits” unless they use their gains to boost production.

There’s no question that U.S. oil companies are booking spectacular profits. However, a fascinating divergence can be found on the charts of two of the biggest names in the industry — BP (BP) and Exxon Mobil (XOM) .

On Tuesday morning, BP posted its second-highest quarterly profit on record, citing the exceptional performance of its gas trading division. BP also announced a new $2.5 billion share buyback program.

Shares of BP have gained about 25% this year. Zooming out to the weekly chart, the stock has been trading in a range between $25 and $34 since February (shaded yellow).

According to an old-school pattern measuring technique, a breakout from that range could propel the stock above $40. However, there is an obstacle lying in BP’s path.

Even if BP does break out of its range, the stock will almost immediately encounter resistance. BP fell sharply in 2020 after breaking the neckline of a massive head and shoulders pattern (L-R).

That bearish pattern formed over a two-year period. The neckline of that pattern projects strong resistance for BP at $35.75 (black dotted line).

Chart Source: Worden

Compare BP’s chart to that of Exxon Mobil (XOM) . Exxon Mobil has already successfully broken out of a similar rectangular pattern (shaded yellow).

The overhang of resistance that is likely to vex BP shareholders is nowhere to be found on Exxon Mobil’s chart. There was no head and shoulders pattern, and therefore there is no neckline to cross. Exxon Mobil closed on Monday at an all-time high of $110.81, so there is no overhead resistance at all on this chart.

Chart Source: Worden

Exxon Mobil’s chart is clearly superior to BP’s, which leads me to a conclusion. I’ve decided to go long Exxon Mobil and short BP, at the same time, in equal dollar amounts. This is known as a pair trade.

Here’s why I like this trade — it eliminates concerns about windfall taxes, the Strategic Petroleum Reserve, OPEC+, the potential end of China’s Covid zero policy, and more. Both companies should be similarly impacted by any events that may affect the energy industry.

When we match two companies against one another, our only concern is that Company A outperforms Company B. Based on the charts, I believe this will be the case with Exxon Mobil and BP, regardless of market direction.

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