British Petroleum needs higher oil prices to reach $60

Aug 18th, 2010 – Comment

I don’t think BP approaches $60 again unless there is a large increase in the price of oil.


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Lou Schizas is an equities analyst, investor, entrepreneur, professor and television and radio personality – and a true believer in the happiness-inspiring powers of capitalism.


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Hi Lou:

Just wondering what your outlook is on BP. Is it a safe buy? Do you see it rising to its previous levels? Love to hear you in the morning on AM 640 insightful, and entertaining.

Thanks
Craig

 

 

Hi Craig,

Great question. British Petroleum( BP NYSE) has seen some recovery from the lows it reached as their runaway well in the Gulf of Mexico sucked over $6 billion out of their vault in an effort to shut it down. The liability associated with the spill will no doubt cost something in the order of $20 billion which is what the Obama administration has posted as their expectation but clearly the final bill on the damage is a guess at best.

The well has been capped and the question you have asked is will the shares of BP return to their previous highs.  Lets examine the charts and get some answers.

 

 

 

 

bp

The three year chart tells the tale of a great disaster destroying wealth as the Macondo well got out of control. The stock dropped from $60.00 all the way to the low of $26.75.

 What I think is worth pointing out is that there were a lot of trading days from the April 20, 2010 explosion on the Deepwater  Horizon drilling platform to the June 28th low. If you ever find yourself with a stock that is in a similar situation remember that your first loss will likely by your best loss. Act quickly to exit your position and preserve capital.

The other patterns worth noting on this chart is the resistance at $60.00 which has been in place since 1998. There is also resistance at $40.00 which has been in place since 1996. Resistance and support are two sides of the same coin. In an uptrend what used to provide support becomes resistance and in a downtrend what used to provide resistance provides support. 

 Support, resistance, and trend are three of the most important concepts in technical analysis. Do some research into the ideas then get out your ruler and start working with the charts to make sure you have a good grasp of these fundamentals.

bp2

The six month chart clearly illustrates the signal generated by the MACD that the bottom was in and that the selling pressure was exhausted. The RSI also confirmed the trend reversal as the stock moved out of oversold territory.

The stock had a good run from the lows but hit resistance at $40.00 which brings me to the fine point of your question. I don’t think BP approaches $60 again unless there is a large increase in the price of oil. The shares are in the penalty box with constrained drilling opportunities in the Gulf of Mexico which was a significant core area for the company. In addition there is the pending litigation from the damage caused by the Macondo spill.  The MACD is turning down which suggests that we may have to retest support at $26.75.

Happy Capitalism!

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