A longer term high oil price of itself would be positive for BHP...

A longer term high oil price of itself would be positive for BHP as about half of their pipeline of new projects are oil and gas related.

I would guess that a view is forming in the investment community that the world economy has hit its growth speed limit and the only cure for the high oil price (and other inflationary forces such as high copper prices) is slower world growth. China recently decreased its subsidy for oil products to its citizens to dampen demand. If the full impact of rising oil prices was passed on to Chinese and Indian citizens I guess we could see a 1974 style global slowdown.

Putting this aside, the BHP share price has global growth expectations built into it of over 5% pa for some years out (remember they didn't actually post a profit increase for last reporting period on the back of 5% global growth, so sub-5% starts to look a bit hard for them). The share price fully reflects the recent hike in iron ore and coal prices, which were well forecast. These size increases for bulk commodities won't occur annually, so growth on these items are now fully built into the share price for some time.


So assuming the head and shoulders marks a medium term top, by the time the share price is ready to recover, we could be seeing declining returns for some of these bulk commodities if BRIC economies are struggling under the weight of higher oil prices, or if higher oil prices lead to other instability in these countries. So BHP will see a step up in there profit in the coming year on the back of higher bulk commodity prices, but may then face several years of flattish or declining profit growth. Given that the BHP dividend is insignificant (ie: holding on for several years of declining or stagnating capital growth can be an unrewarding exercise), this would lead to the view that it should be left on the side of the plate until the world figures out a way to grow at 5% plus without causing underlying inflation, but sustaining commodity price inflation.

In any event, trying to correctly pin down the rationale can be a futile exercise. The rationale might be wrong, but it doesn't change the decision of the investors. They are putting their money elsewhere.