As a massive oil spill reaches the Louisiana coast, many environmentalists are quick to point out that this oil spill should eclipse the Exxon Valdez disaster.
The White House has even noted that this spill is "a leak of national significance," demanding that no additional drilling take place until the investigation into the oil spill is complete. David Axelrod, White House senior adviser, noted that the president "said he is not going to continue the moratorium on drilling but ... no additional drilling has been authorized and none will until we find out what happened here and whether there was something unique and preventable here." The "here" in the quote refers to the current oil spill.
As many as 210,000 gallons of oil are spreading across the Gulf of Mexico -- that is a lot of oil. While this disaster could absolutely cripple the ecosystem, for some reason my first question was what is going to happen to the oil sector. 210,000 gallons of oil is quite a bit, and it could ultimately hurt oil supplies. If this is the case, we could see oil prices rise (as they have been rather inexplicably as of late), which could push the entire oil sector higher.
Checking in on the Oil Service HOLDRS Trust (OIH), the ETF's technical performance suggests that it may be able to withstand any negative reaction to the oil spill and continue the rally it started in 2009. The ETF's 10-week, 20-week and 50-week moving averages are all in a position to provide support, a role the triumverate has filled for the better part of OIH's rally.
Does this mean that all oil stocks will be able to withstand any negative reaction to the oil spill? Not necessarily. My guess is that BP (BP) will take the largest hit and will have to fight its way back to the rally train. However, the entire sector appears strong enough to withstand any negative reaction to the catastrophe.
Please understand, this post in no way reflects my opinions on the oil spill. I am simply looking at the economic impact on oil companies. I am pretty sure that we can all agree that this is an environmental tragedy that will eventually lead to tighter restrictions. Unfortunately, any changes will be reactive rather than proactive -- some day we may get ahead of these problems and cut them off before they take place.