An update on the energy stocks vs futures arbitrage trade

I argued before in the beginning of October ("An arbitrage trade between energy stocks and futures") that energy stocks are overvalued relative to energy futures. At that time, a portfolio of long 1 front month QM (crude oil Emini future contract) and short 640 shares of XLE (energy stocks ETF) has a value of -$2,584. Where is it now? As of the close of October 31, December QM is at $58.725, while XLE is at $55.73 a share. The portfolio is now at -$6,305 (the multiplier for QM is 500). The spread has clearly widened: it is now at a 3-year low.

We are now faced with the usual arbitrage trader's quandary. Is this an unprecendented profit opportunity to double up on this trade, or was this a colossal blunder on my part? I came across this New York Times article about the earnings reports from Exxon and Shell that gave me some comfort. While both energy companies posted huge profits, the article quoted Fadel Gheit, a senior energy analyst at Oppenheimer & Company, that for the fourth quarter, "“the question is not if earnings will decline, the question is by how much.” According to the article, analysts say that for every dollar the price of a barrel of crude oil drops, Exxon forgoes $500 million in profit.

So yes, with my fingers crossed, I am still waiting for the day when this spread closes up.