This post takes a look at BP relative to Exxon at the time of its Valdez disaster. The fear du jour is that BP’s Deepwater Horizon problem is going to be worse than Exxon’s Valdez disaster (see bullet point 5, below), and from a look at the performance of BP relative to Exxon at the time of the alcohol-induced Valdez disaster, shown in the chart below, the market certainly shares that fear.
What I’ve done is plotted Exxon’s stock price in blue from the day before the Valdez spill. I’ve overlaid BP’s stock performance using, as it’s starting point, the day of the explosion. You can see that the market is expecting a far worse outcome for BP. The vertical axis is measured relative to 100: Exxon was down about 6% at its worst; BP is down by 16%. (If nothing else, the DoJ headline below likely has some fat tails in terms of the potential liabilities involved.)
This blog posting excerpt from Zero Hedge is typical (entire post at this link.)
The Gulf oil spill is much worse than originally believed.
As the Christian Science Monitor writes:
It’s now likely that the actual amount of the oil spill dwarfs the Coast Guard’s figure of 5,000 barrels, or 210,000 gallons, a day.
Independent scientists estimate that the renegade wellhead at the bottom of the Gulf could be spewing up to 25,000 barrels a day. If chokeholds on the riser pipe break down further, up to 50,000 barrels a day could be released, according to a National Oceanic and Atmospheric Administration memo obtained by the Mobile, Ala., Press-Register.
CNN quotes the lead government official responding to the spill – the commandant of the Coast Guard, Admiral Thad Allen – as stating:
If we lost a total well head, it could be 100,000 barrels or more a day.
Here are some additional links to other stories:
- Oil Slickonomics – from David Kotok of Cumberland Advisors
- Here’s Who’s Going to Get Taken to the Cleaners Over the Gulf Oil Spill – at Clusterstock/Business Insider
- 20% of BP’s Market Cap, Gone in a Flash – same source
- Uh-Oh: Now the Department of Justice Is Sending a Team to the Gulf Spill – ditto
- WHOA: Oil Spill May Be 5X Previous Estimates, And Could Pass Exxon Valdez TOMORROW - ditto
- Amazing Photos of the Deepwater Oil Explosion – ditto
- Oil Spill Explained – YouTube video
Next, this is a comparison of both stocks relative to the market and risk backdrops. They’re surprisingly similar: the market was in the midst of a strong advance, and implied volatility had been trending lower.
Here’s the environment one year before and after Valdez.
Here’s the environment from April 20, 2009, to the present.
I don’t have any idea where this ends up. David Kotok (link above) points out that estimates at the beginning of disasters are usually too low. I assume he’s right. He’s bald and is older than me. The Clusterstock folks cited above are in New York City; I’m in Fort Wayne, Indiana.
Here’s what I do know. When stocks reach an ultimate bottom, sellers dump the shares, selling them at any price, because they fear the stock/market is going nowhere but down. That time is called capitulation. Volume is huge. See if this qualifies. (Click to enlarge the chart.)
Average daily volume, last five years = 5,124,149 shares
Today’s volume = 155,306,000 shares; 35x the average
That looks capitulation-ish. I’ve also overlaid the Fibonacci retracement of the bear leg from 2008′s peak to 2009′s bottom. Notice how the 61.8% retracement of the move nearly marked, exactly, 2010′s peak. Notice, too, that the 38.2% retracement is at $50.50, while the stock closed at $50.19. Were one to try to play BP for a pop, a close above $50.50 would be a good indication.
If for some crazy reason you decide to trade on these observations, make sure you use a stop-loss or other protective undergarment.