Oil spillage will add to pressure on fuel prices

Kathleen Brooks
THE oil giant BP’s share price was punished by the markets last week after a fire at its Deepwater Horizon drilling rig on the Gulf of Mexico caused a leak that is pumping 5,000 barrels of oil per day into the sea.

But on Friday, BP’s woes transformed into an industry-wide problem after the US authorities vowed that no expansion of US offshore oil drilling would take place until investigations into the disaster have been completed. This puts the brakes on plans announced by President Obama a month ago, which reversed a ban on drilling off the US coast in a bid to get Republicans to support a bill on climate change.

But what does this spillage mean for investors? Killik & Co, the stockbroker, issued a note to its clients detailing the potential cost to BP from the spillage, the clean-up and potential civil damages, which it estimates could cost the company upwards of $2.9bn. However, it argues that after an 11 per cent decline in its share price, the cost of the clean-up and repair operation are already priced in: “We are inclined to see this as a buying opportunity given the strong current trading momentum and the attractive 6.4 per cent dividend yield.”

It does concede that there remains much uncertainty as to what the final bill for BP will be and when the rig will stop gushing oil. Due to this, contracts for difference (CFD) traders should think about taking a look at the wider industry.

The implications of this incident are likely to affect the entire oil industry. Opening up US waters for oil drilling was seen as a coup by much of the industry because it was considered a safe way to build oil reserves. Political unrest, economic nationalism and hostile terrain are all perpetual problems affecting the oil exploration and production business so a source in the US was seen as a safeguard for future supplies. Killik & Co notes that the political fallout from this spillage could derail the prospect of drilling oil in the US altogether: “Following this spill, it may be more difficult to achieve this aim as environmental groups step up their opposition,” said its analysts.

Although the recent suspension of drilling off the US coast doesn’t have immediate repercussions on global oil supplies, analysts highlight that increased concerns about supply is likely to add upward pressure on prices. The oil price duly moved higher last week and remains at its highest level since the start of the financial crisis, just above $86 per barrel. However, it is still a fair way off the peak reached in the summer of 2008 when the price rose to nearly $150 per barrel.

Supply worries caused by the oil spillage, continued high demand from the fast growing emerging market nations and the return to economic growth in the West could all combine to create a summer of elevated oil prices. CFD traders who believe the bullish oil story should think about a long position in the product.