The Correlation Between a Companys Product Price and Share Value - Research Paper Example

The Correlation between a Company’s product Price and Share Value Share prices are affected by a number of economical aspects. Among the economical factors, include the management quality of a firm, political stability and performance of an industry. A share value may either show a positive or negative correlation relative to a given aspect. In most cases, improvement in the performance of various economical aspects increases the value of a stock. A large number of investors rely on the quality of various factors that affect the value of a stock, especially when making investment decisions. However, a minimal attention is always paid to the correlation between the price of a share and product of a company. There have been a few researches regarding the importance of commodity prices in determining the value of various companies’ values. It is imperative to understand whether commodity price is a key aspect that should be considered while choosing a share on a financial market. In regards to a stock-venture decision, this paper is set to assess the correlation that exists between the prices of a product and share value. The analysis and discussion would be based on the British Petroleum shares and market oil prices. Introduction British Petroleum is a multinational oil company that was founded in the year 1989. Its headquarters is in London, U.K. The company engages in the provision of natural gas, petroleum, transportation fuel and petrochemical products. The firm’s operations are majorly categorized in three parts. This include the upstream, midstream and downstream. The upstream part is comprised of the exploration of oil and gas, as well as production. The midstream is concerned with processing and transportation, while the downstream is associated with marketing and trading of various oil and natural gas products. Besides oil and natural gas production and trading, British Petroleum has interests in the production of renewable energy such as bio-fuels and wind energy (Bedford 27). In regards to exploration and production, British Petroleum has operations in various countries including the US, Australasia, Canada, Angola, the UK, Egypt and North Africa among other parts of the world. In the energy industry, British Petroleum is ranked fifth in relation to market capitalization and revenues by the end of the year 2012 (Yahoo Finance 1). The company’s revenue by 2012 was US$388 billion, while its operating income stood at US$19 billion (Yahoo Finance 1). As of 2012, the company’s profit was US$11 billion, whilst the number of employees was estimated at 85,700 worldwide (Yahoo Finance 1). The company’s competitors in the energy sector include Exxon Mobil Corporation, Petroleos Mexicanos, Chevron Corporation, Repsol, Royal Dutch Shell plc, Total SA and Eni SpA among others. The BP plc shares are primarily traded on the London Stock Exchange. Moreover, the shares are also listed on other stock markets such as the Frankfurt Stock Exchange and New York Stock Exchange. The company’s equities comprise of original British American stocks and other stocks that were acquired through amalgamations with ARCO and Amoco (North and Caes 23). Data Collection The data for assessment in this discussion was collected from a number of sources. The share prices for the BP plc were collected from Yahoo Finance while the adjusted market oil prices were collected from Investing.com. The adjusted oil prices reflect average prices for each week. The share prices in this research reflect the adjusted closing prices for every week. Other data are collected from a number of sources that are referenced at the end of this paper. Economy and Oil Consumption in OECD and Non-OECD Countries The consumption of oil depends highly on the strength of an economy. There have been high levels of oil consumption among the members of the Organization of Economic Cooperation and Development. As of 2010, the OECD countries’ consumption was more than 53% percent (Spilsbury, and Spilsbury 13). However, there have been low rates of growth in terms of oil consumption among the OECD countries. Spilsbury and Spilsbury (26) confirm that the OECD members’ oil consumption declined between the year 2000 and 2010. Conversely, the non-OECD countries experienced a rise of 40% between the year 2000 and 2010 (Spilsbury, and Spilsbury 33). The high level of oil consumption in developed countries is attributed to the fact that a large number of households own vehicles relative to their counterparts in developing nations. As a result, high level of oil consumption is likely to result from considerable levels of transportation. Nonetheless, the OECD members are likely to realize a decrease in oil consumption following a number of policies, such as increased taxes and adoption of new models of vehicles. A majority of policies are encouraging the use of alternative energy such as bio-fuel. The OECD countries are associated with less percentage of manufacturing activities in relation to services- this means there would be a less demand for oil. In addition, a large number of the OECD countries are associated with fewer subsidies. Therefore, changes in the market prices are likely to be shouldered by consumers. Although prices may increase due to market conditions, consumers do not adjust their consumption level quickly. It takes a long period before an individual engages in an efficient use of energy (Hafer and Scott 44). Consequently, demand is not inclined to change in a short period. Expectations among consumers regarding future oil prices also play a major role in determining the future demand. If consumers are expecting oil prices to rise, they are likely to buy energy-efficient motors or opt using public transportation. These decisions are imperative as far as controlling the future oil prices are concerned. Table 1 The New York Stock Exchange BP plc Weekly Share Prices between June 2013 and December 2013 Date Adjusted Close Previous Price Change in Share Value Percentage change 12/9/2013 46.57 46.8 -0.210000000000001 -0.49% 12/2/2013 46.8 47.01 -1.02 -0.45% 11/25/2013 47.01 48.03 0.850000000000001 -2.12% 11/18/2013 48.03 47.18 1.09 1.80% 11/11/2013 47.18 46.09 0.100000000000001 2.36% 11/4/2013 46.09 45.99 2.86 0.22% 10/28/2013 45.99 43.13 0.330000000000005 6.63% 10/21/2013 43.13 42.8 1.16 0.77% 10/14/2013 42.8 41.64 -0.130000000000003 2.79% 10/7/2013 41.64 41.77 -0.509999999999998 -0.31% 9/30/2013 41.77 42.28 0.340000000000003 -1.21% 9/23/2013 42.28 41.94 0.509999999999998 0.81% 9/16/2013 41.94 41.43 0.119999999999997 1.23% 9/9/2013 41.43 41.31 0.510000000000005 0.29% 9/3/2013 41.31 40.8 -0.210000000000001 1.25% 8/26/2013 40.8 41.01 0.189999999999998 -0.51% 8/19/2013 41.01 40.82 0.0499999999999972 0.47% 8/12/2013 40.82 40.77 -0.119999999999997 0.12% 8/5/2013 40.77 40.89 -1.61 -0.29% 7/29/2013 40.89 42.5 0.560000000000002 -3.79% 7/22/2013 42.5 41.94 0.799999999999997 1.34% 7/15/2013 41.94 41.14 0.990000000000002 1.94% 7/8/2013 41.14 40.15 -0.550000000000004 2.47% 7/1/2013 40.15 40.7 0.0200000000000031 -1.35% 6/24/2013 40.7 40.68 -1.09 0.05% 6/17/2013 40.68 41.77 -0.109999999999999 -2.61% 6/10/2013 41.77 41.88 0.0399999999999991 -0.26% 6/3/2013 41.88 41.84 -0.599999999999994 0.10% Table 2 Weekly Market Oil Prices between June 2013 and December 2013 Date Closing Price High Percentage Change 8-Dec-13 98.52 0.76% 1-Dec-13 97.77 5.38% 24-Nov-13 92.78 -2.16% 17-Nov-13 94.83 1.17% 10-Nov-13 93.72 -0.69% 3-Nov-13 94.38 -0.24% 27-Oct-13 94.61 -3.33% 20-Oct-13 97.87 -2.95% 13-Oct-13 100.85 -0.95% 6-Oct-13 101.82 -1.76% 29-Sep-13 103.64 0.78% 22-Sep-13 102.84 -1.93% 15-Sep-13 104.86 -3.39% 8-Sep-13 108.53 -1.56% 1-Sep-13 110.26 2.42% 25-Aug-13 107.66 1.22% 18-Aug-13 106.36 -1.24% 11-Aug-13 107.69 1.44% 4-Aug-13 106.17 -0.64% 28-Jul-13 106.85 2.13% 21-Jul-13 104.62 -3.33% 14-Jul-13 108.23 1.94% 7-Jul-13 106.17 2.59% 30-Jun-13 103.48 7.29% 23-Jun-13 96.45 2.73% 16-Jun-13 93.89 -4.04% 9-Jun-13 97.84 1.70% 2-Jun-13 96.2 4.99% Table 3 A Comparative Table of BP plc Share Values and Market Oil Prices Date Weekly Share Prices Weekly Oil Prices 12/9/2013 46.57 98.52 12/2/2013 46.8 97.77 11/25/2013 47.01 92.78 11/18/2013 48.03 94.83 11/11/2013 47.18 93.72 11/4/2013 46.09 94.38 10/28/2013 45.99 94.61 10/21/2013 43.13 97.87 10/14/2013 42.8 100.85 10/7/2013 41.64 101.82 9/30/2013 41.77 103.64 9/23/2013 42.28 102.84 9/16/2013 41.94 104.86 9/9/2013 41.43 108.53 9/3/2013 41.31 110.26 8/26/2013 40.8 107.66 8/19/2013 41.01 106.36 8/12/2013 40.82 107.69 8/5/2013 40.77 106.17 7/29/2013 40.89 106.85 7/22/2013 42.5 104.62 7/15/2013 41.94 108.23 7/8/2013 41.14 106.17 7/1/2013 40.15 103.48 6/24/2013 40.7 96.45 6/17/2013 40.68 93.89 6/10/2013 41.77 97.84 6/10/2013 41.88 96.2 A Correlation Graph of Weekly Oil Prices versus BP plc Share Prices between June 2011 and December 2013 Table 4 A Comparative Table of Percentage Change of Share Value versus Oil Price Date % change of Share Prices % Change in Oil Prices 12/9/2013 -0.49% 0.76% 12/2/2013 -0.45% 5.38% 11/25/2013 -2.12% -2.16% 11/18/2013 1.80% 1.17% 11/11/2013 2.36% -0.69% 11/4/2013 0.22% -0.24% 10/28/2013 6.63% -3.33% 10/21/2013 0.77% -2.95% 10/14/2013 2.79% -0.95% 10/7/2013 -0.31% -1.76% 9/30/2013 -1.21% 0.78% 9/23/2013 0.81% -1.93% 9/16/2013 1.23% -3.39% 9/9/2013 0.29% -1.56% 9/3/2013 1.25% 2.42% 8/26/2013 -0.51% 1.22% 8/19/2013 0.47% -1.24% 8/12/2013 0.12% 1.44% 8/5/2013 -0.29% -0.64% 7/29/2013 -3.79% 2.13% 7/22/2013 1.34% -3.33% 7/15/2013 1.94% 1.94% 7/8/2013 2.47% 2.59% 7/1/2013 -1.35% 7.29% 6/24/2013 0.05% 2.73% 6/17/2013 -2.61% -4.04% 6/10/2013 -0.26% 1.70% 6/3/2013 0.10% 4.99% A Correlation Graph of Weekly Percentage Change in BP plc Share Prices versus Percentage Change in Market Oil Prices June 21 Lawyer Reviewing Settlement of BP Oil Spill Accused of Bribery and Share Value Decline The prices of shares were high at the beginning of June. The high prices of shares were attributed to favorable news regarding the Alaska new field exploration and production. However, a week before the end of June, shares began experiencing a decline following the bad news regarding the misconduct of a lawyer who was overseeing the settlement concerning the BP Gulf Oil spillage. The lawyer was accused of receiving money from a law firm that represented a certain claimant. News report claimed that a BP employee was aware of the happening. The settlement was associated with the explosion that occurred in April in a deepwater rig that left eleven people dead. News regarding the misconduct was endangering the BP plc profits. In this regard, investors were afraid that other claimants might be filing for unjustified compensations. Consequently, it was exposing the company to additional costs, a factor that would lead to decline of the BP plc profits. In this regard, investors were skeptical about the BP plc shares. This caused the shares to experience a decline in the last week of June. Additionally, there was an earlier expectation of a positive progress following the bad news that happened in April, 2010- this aspect was not realized. Since news was becoming worse than before, BP plc shares were bound to fall (Argentesi and Helmut 44). This explains the significant decline of BP plc shares by 1.35% in a week despite oil prices rising by 7.29% on 1st July, 2013. July 2 The Increased Production, Upgrade of the BP’s Whiting Refinery and the Gain of Share Value The share prices began experiencing an increase in value in the first week of July. On 8th July, 2013, the BP plc shares had risen by a significant increase of 2.47%. The prices of oil were correlating with that of shares in the first and second week of July. For instance, the prices of oil increased by 2.59% while that of shares increased by 2.47% on 8th July, 2013 (see table 4). In the second week, both shares and oil prices showed an increase of 1.94% (see table 4). Despite the value of shares responding to the prices of oil on the market, the increase of BP plc shares value increase can be attributed to favorable news that was experienced in the first week. There was news regarding the comeback of a refinery in Indiana. The refinery was realizing a sizeable production, a factor that was perceived to contribute positively to the company’s operation and financial situation. News concerning the plans of upgrading the refinery in a short period was also perceived positively by investors. As a result, there BP plc shares were experiencing share value increase. The share prices’ increase persisted even in the face of oil prices decline on 22nd July, 2013 (see table 1). The oil prices declined by a significant margin of 3.33% while the share values increased by 1.34% (see table 4). This denotes that investors were hopeful about the BP plc shares’ value in the near future. This is attributable to the fact that the new refinery would generate a cash flow of one billion dollars every year. According to reports, the Whiting refinery is the largest among the BP plc refineries given that it has the ability of handling more than 4,000,000 barrels of oil every day following the upgrade (Investing.com 1). Consequently, there was hope among investors in respect to BP plc and associated equities. July 19 A Federal Judge States That Bp Cannot Avoid Payment of Penalties Indicating High Costs On 19th July, BP plc was faced with bad news following a Federal ordering that BP plc should face the payment of various settlements with respect to the Gulf Oil spill (Investing.com 1). BP plc had endeavored to halt the payment citing the attempts of bribery acts by a claimant’s lawyer. As a result, investors were skeptical that BP plc would face high costs of settling various businesses and residents that resided near the Gulf of Mexico during the explosion incidence. As a result, shares value showed a slight increase of 1.34% on 22nd July and considerable loss of 3.79% by 29th July. July 29 Fall in Profits and Increased Oil Spill Costs The BP plc operations were facing high costs resulting from increased taxation and prevailing low oil prices (Investing.com 1). Other additional costs were causing BP plc to face high costs of operation and declined profits. Moreover, investors were scared by the increased costs associated with the claims settlement that had resulted from the oil spill in the Gulf in Mexico. The company informed the public that the claims had raised the costs by more than $1 billion (Investing.com 1). This was due to the fact that there were further claims filed. Although the BP plc has challenged court in regards to the claims- payment of businesses that are located on the extreme ends of Gulf, investors developed negative perception about the firm’s balance sheet since costs were increasing significantly. This explains the reason why share value experienced a decline of 0.29% in the first week of August (see table 1). The small decrease was caused by earlier information that was anticipated regarding the Fed’s requirement of claims settlement. However, the decrease in the value of shares by 0.29% during the first week of August can be partly attributed to oil prices decrease- oil prices decreased by a margin 0.64% (see table 4). In the second week of August, the price of oil increased significantly by 1.44%; the prices of oil responded by an increase of 0.12% (see table 4). Generally, the prices of share were able to realize a slight increase of 0.12% despite the high costs associated with the BP plc operation as a result of the significant increase of oil prices (oil prices increased by 1.44% by 12th August, 2013). Changes between August and September The company share prices remained above the 0% mark during the months of August and September despite oil prices experiencing constant decreases with the worst decline occurring on 16th September- oil price fell by 3.39% (see table 4). Between 8th August and 23rd September, shares showed persistent increases in value, and only showed a decrease on 26th August where a decline of 0.51% was experienced (see table 4). The Cancelling of Oil Expansion Contract on 19th August by BP plc The reason for the slight decline of share value of 0.51% on 26th August can be attributed to the cancelling of an oil expansion contract by BP plc on 19th August (see table 4). The plan for expanding an oil project in the Mexico’s Gulf was terminated by BP plc following the uncertainties that characterized the oil prices, and high costs. The move by BP plc was perceived negatively among investors since the extension of the oil project would have boosted the company’s output. This explains the decline of share prices by 0.51% in the face of consistent prices during August and September (see table 4). October 3, 2013 The Partial Win of the Oil Spill Payment Dispute and Market’s Earlier Reactions BP plc share prices ended on 30 September, 2013 with a decline of 1.21% despite oil prices increasing by 0.78% (see table 4). This shows that there was an uncertainty about the results of ruling by the federal appeals court. Given that federal had earlier confirmed that BP plc would not halt the payment of claims, investors were anticipating the company to meet the high costs of oil spill settlement. As a result, the share prices were more bound to fall than rise. This saw the shares fall by 1.21% on 30th September (see table 4). The good news that emerged regarding the dispute of oil spill settlement in the middle of the first week saw share prices fall by a minor margin of 0.31% (see table 4). The court gave the BP plc claims ‘further consideration’ (Investing.com 1). In respect to the court argument, there was a need to clarify the formula that was employed to calculate the probable losses (Lakhal 23). The court’s ruling regarding the misinterpreted heavy settlement costs saw shares experience a significant rise of 2.79% on 14th October despite oil prices showing a persistent decrease from 14th October to 11th November on an average weekly oil prices (see table 4). October 9 Further Good News of Gulf Drilling Rigs: The Number of Rigs Reaches a Record of 9 The addition of two drilling rigs in Mexico’s Gulf by BP plc after three years following the oil explosion brought the number of drilling rigs to nine (Investing.com 1). The company also assured that each year it would be investing more than $4000, 000,000 in the Mexico’s Gulf (Investing.com 1). This news enhanced confidence among investors regarding the company’s future operations and stability. Coupled with partial win of the settlement dispute, the company reached a record percentage increase of 6.63% in the face of a significant decrease of 3.33% by market oil prices as of 28th October, 2013(see table 4). However, the share prices did not show a significant increase on 4th November (see table 4). The slight change can be attributed partly to the persistent decrease of the market oil prices. As of 4th November, 2013, share prices increased by 0.22% (see table 4). On the other hand, the oil prices experienced a decrease of 0.24% (see table 4). Moreover, the share prices showed a significant increase on 18th November following a positive percentage change realized by the market oil prices (see table 4). December 3 The Ruling by Feds Appeals Court turns out to be Favorable to BP plc In the end of November, share prices began falling. The share prices closed by a percentage decrease of 2.12% relative to a decline of 2.16% oil market value (see table 4). However, the share prices experienced a higher percentage fall on 9th than 2nd December despite the favorable news regarding the resettlement claims (see table 4). The Federal appeals court ordered the court looking into the case of oil spill to investigate whether claimants suffered the loss directly from the disaster or not (Investing 1). This means that there is a high chance of BP plc being spared a certain amount of the claims settlement. As a result, the company’s settlement cost estimated at ‘$9.2 billion’ would reduce to manageable levels (Investing.com 1). This was good news; however, it did not result in a positive change to the share prices. The share prices fell by 0.45% on 2nd December and 0.45 as of 9th December, 2013 (see table 4). More importantly, the share prices continued falling despite oil prices showing an increase of 5.38% and 0.76% as of 2nd and 9th December respectively (see table 4). December 6 Uncertainty on the Market and Payment of Settlements to Escort Service and other Unjustified Firms The constant decreasing share prices might be as a result of an uncertainty on the market and payment of settlements to various firms- these aspects lead to heavy costs. Perhaps individuals were currently shunning the BP plc shares with an intention of buying them later at a low price. The behavior of the investors was partly causing the share prices to experience a decrease in value regardless of the market oil prices increasing significantly. Additionally, there was unjustifiable payment of claims according to BP plc. For instance, Escort service presented an accounting statement that did not show date of preparation (Investing.com 1). Escort service was paid a total of $174,000 (Investing.com 1). A lawyer who is located more than 190 miles from the coast was also compensated despite his license being rescinded in 2010 (Investing.com 1). A nursing home that was closed down more than eleven months before the explosion was also compensated. These are a few examples that were believed to be an unjustifiable. As a result, investors were skeptical about investing in the BP plc shares since huge payments meant future less profit. This happening should have contributed to the persistent decrease of the BP plc share prices even with the increasing oil prices (Byrd 18). There is a mix of reactions among the investors considering that holiday is associated with a considerable level of transportation; and high level of profits are bound to be experienced amongst oil companies during the December holiday. Results of Correlation between Oil and Bp Plc Share Prices The results show that there is a minimum positive or negative correlation between oil prices and share values. The value of shares majorly depends on economic news. This is evident by the changes that occurred from June to December in the year 2013 (see table 3). For instance, there was an inconsistency in both share and oil prices from 9th September to 11th November 2013 (see table 3). The Table below shows inconsistency that occurred between oil and share prices. Table 5 A Part of a Comparative Table of Percentage Change of Share Value versus Oil Price Date 11/11/2013 Share Prices 2.36% Oil Prices -0.69% 11/4/2013 0.22% -0.24% 10/28/2013 6.63% -3.33% 10/21/2013 0.77% -2.95% 10/14/2013 2.79% -0.95% 10/7/2013 -0.31% -1.76% 9/30/2013 -1.21% 0.78% 9/23/2013 0.81% -1.93% 9/16/2013 1.23% -3.39% 9/9/2013 0.29% -1.56% The above table indicates that oil experienced a consistent decrease of prices from 9th to 23rd in September while shares realized a value increase for the same period (see table 5). On 30th September, the price of a share decreased while that of oil increased (see table 5). This shows further inconsistency of a negative correlation. A further negative correlation was witnessed on between 14th October and 11th November (see table 5). In this duration, oil prices experienced a decline in value whilst share prices faced a consistent increase in value. The table below shows the positive correlation between oil and share prices that appeared on certain dates from a period that started in June and ended December, 2013 (see table 6). Table 6 A Partial Positive Correlations between Oil and Share Prices Date 6/3/2013 Share Prices 0.10% Oil Prices 4.99% 6/24/2013 0.05% 2.73% 6/24/2013 0.05% 2.73% 7/15/2013 1.94% 1.94% 7/8/2013 2.47% 2.59% 11/25/2013 -2.12% -2.16% 11/18/2013 1.80% 1.17% The above table indicates that there were instances where oil and share prices indicated a positive correlation. However, an individual that can find out that the positive correlation was not consistent given that it occurred on specific weeks. Additionally, there was discrepancy with respect to the margin of change. In other situations, the share prices experienced higher margin change than that of oil. This is also true for the percentage of oil prices in relation to that of stock. For instance, while the share and oil prices showed similar value increase of 1.94% on 15th July, the prices differed on 24th June where equities faced an increase of 0.05% whilst oil increased by 2.73% (see table 6). This shows that there is no consistency between the share and oil prices (Buffett and David 36). Conclusion The above discussion indicates commodity and share prices do not correlate. This is evident by product and shares prices failing to correlate positively in the presence of market other factors. As a result, attention should be paid to other factors that affect the value of a share. For instance, despite a product price experiencing a gain in the market value there is a high possibility of a firm’s share value experiencing a loss if management of a company is poor. This is one of the reasons that explain the lack of correlation between the BP plc share and oil prices. In summary, a company’s highly relies on other economic news such as firms specific features, including financial performance; and external forces, such as government regulations and environmental risks. However, prices play a major given that they contribute to a company’s bottom line (Matania 618). This means that a high price reflects an increased income for a firm. This is directly reflected on the share through increased value. Nonetheless, it should be noticed that a number of shares increase in value prior to the increase of a product price due to expectations among investors. However, such a share’s value increase is normally reflected in a product price in the long-run through various adjustments and market corrections. In conclusion, potential investors should base their investment decision on economic news regarding a company and market. Works Cited Argentesi, Elena, and Helmut Lütkepohl. 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