With the recent tragic events in the Gulf of Mexico we have seen how an environmental incident has also had political and financial implications across the world.
BP has spent more than a month trying to repair a damaged undersea oil well off the coast of Louisiana, and now the US Department of Justice has launched criminal investigations into their operations. These unfortunate events have impacted a range of related markets, from the price of oil to BP's stock to various global indices.
We take a brief look at what impact the oil spill has had on these three markets in particular, and how they are inter-related.
The price of oil
A major determinant of the price of crude oil is global supply, which is influenced by factors such as production, inventory, demand and various natural causes. The price of oil in turn influences almost all economic output globally, as oil is one of the main costs of production and service delivery. Needless to say, the oil price is therefore one determining factor in an individual company's share price, and it certainly has an impact on an index such as the FTSE 100.
Despite the shocking image of up to 19,000 barrels of oil per day leaking into the sea, the output of the Deepwater Horizon rig was just a small percentage of global oil supply, certainly not enough of a loss to inflict a dramatic oil price hike on its own. Similarly, demand for oil is no more or less than it was before the leak. This presents the argument that the movement we have seen in the oil price these past few weeks is down to uncertainty – over the ecological impact and the future of a company like BP – rather than purely economic factors.
But uncertainty is an inexact science, and is prone to counter- and over-reaction, often resulting in volatility over a short period of time rather than sustained movement in a particular direction.
The FTSE 100
Considering the impact that the price of oil has on operational costs, you might expect a negative relationship between the price of oil and, for example, an index of the UK's largest blue-chip companies. However, the graph above suggests the relationship is a positive one, almost a mirror image in fact. This can be explained by the number and size of oil majors on the FTSE 100. The likes of BP and Royal Dutch Shell certainly have a positive and immediate relationship with the price of oil, and almost by their influence alone the index is dragged along a similar path as the price of crude.
BP's share price
Clean-up efforts in the Gulf of Mexico have understandably had a dramatic impact on BP directly. The past few weeks have seen the UK’s biggest corporation (and the third largest energy company in the world) riding a share price rollercoaster. On Tuesday 1 June BP suffered its biggest daily loss for 18 years, tumbling 13% in a single session.
This massive decline has even had a material impact on the FTSE 100 index. Since mid-April, BP’s share price has fallen by 35% and is responsible for a quarter of the FTSE’s 11% decline over this time. On Tuesday alone BP’s losses accounted for 47 points off the blue-chip index.
And yet investors remain vigilant in the knowledge that the mere mention of a successful plug could turn BP’s stock around, and everyone wants to call the bottom of the market and take advantage of low prices.
Take a position
Global indicators are just as much an indication of political and environmental events as they are purely financial. This affords traders the opportunity to use their knowledge of non-financial issues to their benefit, and spread betting offers an attractive alternative to traditional trading to make this knowledge work for you.
For example, looking back at the graph above, if you think you have a good idea of where the price of oil might be heading, you could also make a reasonable judgement of the direction the UK’s leading index may take.
IG Index offers prices on individual shares, indices, and commodities such as oil prices. We also offer specifically-designed Binaries and Options that are ideally suited to times of high volatility in various world markets.
Updated: 02/06/10
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.