Energy prices are on the rise after Sunni militant fighters started attacking and capturing several cities in Iraq. Oil prices could exceed $150 per barrel if Iraqi production is completely lost. BMO Capital Markets Equity Derivatives Strategist Max Breier was interviewed on Bloomberg Television’s “Market Makers,” where he discussed his options play for the SPDR S&P Oil & Gas Explore & Prod. ETF (NYSEARCA:XOP). Let’s take a look at some of the highlights.
The program started with Mr. Breier explaining why bond investors have reacted so decisively to the inflation data, while equity investors were less alarmed.
“Bonds are reaching what most people think is a ceiling, or a floor, as far as yields go. So, there is not much more room to the downside for yields. There is a natural convexity in the bond market that is not present in equities, just based on where yields are at this point.”
On the opposite, the market is telling us that equities have more room to rise still: volatility is very low in most asset classes, same as the VIX, so “there is a bit of complacency, if you will, but there is no major risk factors to shake thinks up.”
As the interview continued, Mr. Breier went over the SPDR S&P Oil & Gas Explore & Prod. (XOP), a fund that seeks to replicate as closely as possible the total return performance of the S&P Oil & Gas Exploration & Production Select Industry Index. The ETF includes E&P companies, mainly mid-cap (and even smaller capitalization) firms. “With everything that is going on, both in Iraq, and growth coming in better than expected out of China (…) there is a lot of reasons to be bullish on crude, and therefore, bullish on the E&P –he explained. So, the trade that we like calls out to September. SPDR S&P Oil & Gas Explore & Prod. is trading around 81, so the 87-92 call spread for about $1 gives you a great payout and a great way to get long the upside in the E&P names.”
Within the energy segment, one stock has been particularly active lately. Williams Companies Inc. (NYSE:WMB)’s stock rose 2.3% today, after surging about 19% yesterday, following the announcement of a proposed merger with Access Midstream Partners LP (NYSE:ACMP). “We are seeing continued call-buying. We saw call-buying before the proposed merger was announced. And this is a somewhat low volume stock; so a 20% move in Williams is actually a very large move for this type of stock. And it’s really a play on the energy infrastructure; as we all know there is a huge supply shift coming online in the U.S., both in terms of natural gas and crude. What’s lacking is the infrastructure to move that energy around,” Mr. Breier said.
Disclosure: Javier Hasse holds no position in any equities, bonds or ETFs mentioned