Should you invest in BP shares now as oil prices pull back?
BP Plc (LON:BP) (NYSE:BP) share price surged 1.72% last week Wednesday to trade above 310 GBX before pulling back late on for a net intraday gain of 0.37%. The pullback came after news that OPEC and the UAE had reached a compromise deal to unlock oil supply.
Oil prices recently climbed to trade at a new multi-year high of about $75.25 per barrel before pulling back amid a stalemate between Saudi Arabia and the UAE. BP’s share price advanced more than 72% between October last year and June this year as oil prices went on an extended rally.
However, the stock has remained relatively choppy this year due to uncertainty about production supply cuts amid the easing Covid situation.
How does a reduction in oil supply cuts affect BP stock price?
In economic terms, increased oil supply should have a negative impact on the oil price, which in turn affects the share prices of oil companies like BP. However, things can be a little different depending on the market sentiment.
For instance, investors perceive a reduction in oil supply cuts, which essentially is increasing supply, as a positive. The interpretation is based on the assumption OPEC will only reduce production cuts if the market conditions demand it. And if the demand for petroleum products is rising, it means business activity including travel, is improving, which is good for oil companies.
However, if OPEC increases oil supply due to pressure from one of the major oil-producing countries, it could be perceived as a negative move because the market conditions may not be ready for increased supply.
That’s why oil prices pulled back late on Wednesday alongside the share prices of oil-producing companies.
According to Reuters, Saudi Arabia agreed to Abu Dhabi’s request to have the UAE's “baseline - the level from which cuts under the OPEC+ agreement on supply curbs are calculated - set at 3.65 million bpd from April 2022, up from 3.168 million now.”
This is a very small change, meaning the market may have overreacted to the news about the compromise. Therefore, it looks like oil prices could bounce back in the coming days and resume the initial rally. Analysts have a price forecast of about $85.00 per barrel for the light crude oil this year, while some are more optimistic with targets as high as $100.00.
BP shares could extend current gains significantly in the second half of the year.
How will BP benefit from the improving covid situation?
Although the world is still concerned about the delta variant, the covid situation appears to be easing significantly across the globe. The vaccinations have allowed the world to resume various activities that could not be possible a few months ago.
International travel is peaking and business activity is getting back to normal. All these will result in increased demand for energy including petroleum products. As such, oil prices will receive another boost, which is why some analysts are optimistic of a $100.00 price per barrel. Oil companies like BP will, in turn, witness a significant improvement in profit margins.
Analysts still expect BP earnings per share to decline significantly this year before bouncing back next year. The decline this year is primarily due to the damage done during the first half.
The company’s forward price-earnings ratio of just 8.08 and an attractive dividend yield of 5.03% (at the time of writing), make it an attractive opportunity to invest long term.
Not Investment Advice
Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.