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Following the Deepwater Horizon disaster in April 2010, BP’s drop in share price from 658p was swift and culminated in a 55% total decline before it bottomed out at 300p.
Since then the share price has tried to appropriate the 500p level twice and failed. With 520p representing the 61.8% retracement of the entire move, traders have felt that, given the uncertainty surrounding resulting penalties and potential costs, profit should be taken with any forays through the £5 mark.
The new Gulf of Mexico oil spill trial opens today in New Orleans, and is expected to last a month. BP will fight back against the potential penalties, but could face fines up to $18 billion. Under the Clean Water Act, BP could be fined $1100 for each barrel of oil that escaped into the Gulf, rising to $4300 a barrel if the company is found to be guilty of gross negligence. Government estimates are that 4.2 million barrels of oil were spilled during the 87 days, while BP says it was 2.45 million and that the government used untested methods to reach its figure.
The price action reflects the uncertainty felt over the last few weeks, having falling below the three-year trend line and finding a degree of bidding at 434p (38.2% retracement). We have a pivotal level here, and any close below 434p sets up a potential return to previous support around 416p.
With oil prices in general starting to pull back from the highs of this year, there is strong overall potential for a lower share price.