Will BP make a comeback in 2012?

The price of BP plc (NYSE:BP) rose last month by 11.2% and thus completed one of the best performing months in 2012. Will this rally last? Let’s examine the recent developments related to BP including the settlements of the 2010 oil spill, the relation this stock price has with S&P500 and oil prices.

Oil and BP

During last month BP’s stock increased by nearly 11.2% and thus experienced one of its best performing months in 2012. On the other hand, oil price, which is strongly linked with BP’s stock price, declined during June by 1.8% and by extension United States Oil (AMEX:USO) also fell by 2.4%. If not for the hike in oil rates on the last day of the month (June 29th) they would have finished June much lower than they actually did.

oil and BP 2012 jULY

The chart below presents the changes of the BP’s stock and oil price (C1 future) during 2012 up to date.

The chart shows how BP and oil are strongly linked. Further during 2012 the linear correlation between the daily percent changes of WTI oil (C1 future) and BP’s stock price was 057, which is a very strong and robust correlation. This means the volatility of oil price might explain (under certain assumption including linearity of relation and normality of prices) nearly 32% of BP’s stock volatility in 2012.

The price of oil was very volatile in recent days with sharp price swings. If oil will continue to trade up it could also help rally BP’s stock price.

S&P500 and BP

On the other hand, S&P500 didn’t do much during June but eventually ended up 4% higher than in May. The modest rally of S&P500 could have also contributed to the rise of BP. During 2012 the linear correlation between the daily percent changes of S&P500 index and BP’s stock price was 0.7, which is an even stronger relation than the one oil and BP have. This means the volatility of S&P500 might explain (under the abovementioned assumptions) nearly 49% of BP’s stock volatility in 2012.

Despite the recent developments in S&P500 and oil price the recent news related to the oil spill settlement of BP could be among the factors that pulled this company’s stock price up and could continue to do so in the months to follow.

BP Oil Spill update

The recent news on the oil spill aftermath is that BP is close to an agreement with U.S Justice Department over the 2010 oil spill. BP already spent as much as $29.8 billion in clean up and paying off third party settlements; it had originally set aside a total of $37.2 billion for this oil spill penalty. The company sold some of its operations inWyoming in order to finance the oil spill. If the settlement with the Justice Department will come though it is likely to put the final price tag on the oil spill and lower the risk premium of the company.

What is the bottom line?

I suspect the recent change in the direction of oil prices, the modest rise in S&P500 and the upcoming conclusion of the Gulf of Mexico oil spill could mean BP’s stock price will continue to recover in the near future.

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