Why I think the OPEC cuts may not be enough to save the BP share price

The BP share price has crashed by 34% in 2020. The OPEC cuts of 10% global oil supply may not be enough to save it or the oil price.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The BP (LSE: BP) share price has dropped 34% since the beginning of the year. The oil market crash of 2020 has driven the share price down to a five-year low. The OPEC cuts are unlikely to help.

BP is in good company. FTSE 100 oil major, Royal Dutch Shell is also hurting. Its shares are down 38% from its 2020 high. Meanwhile, stocks of smaller peers Tullow Oil and Premier Oil have plummeted 63% and 75% respectively.

The oil price crash was initially caused by the coronavirus-induced slow down in demand for oil. But this happened at the same time as its oversupply. And with OPEC+ refusing to cut production, share prices in oil companies tanked further.

However, OPEC+ signed a US-backed deal on Sunday. The aim is to cut almost 10% of the global oil supply. The hope is this will be enough to raise oil prices, and with them, the shares of oil companies.

However, I am skeptical.

BP share price is helped by its diversity

BP is an integrated oil company. This means it operates in every aspect of the oil and gas business from oil exploration and production (E&P) to refining to trading. It also has a renewable energy division. Therefore, its share price represents the diversity of its operations. 

The oil majors can offset the now lower-margin E&P assets with cheaper oil feedstock into their refining businesses. They are also big oil traders, able to use the market to add value to their positions. Smaller peers based only in E&P are far more exposed to oil market volatility.

This higher exposure is mirrored in the size of their respective share price crashes. Indeed, the market appears to have already accounted for business model differences between oil firms.

OPEC cuts production by 9.7m barrels

Sunday’s deal means that OPEC is going to cut oil production up to 9.7m barrels per day. However, this reduction is from an already raised production level. Some traders doubt this will be enough to boost prices in the short term due to the oil glut.

With no end to the coronavirus pandemic in sight, oil demand is not likely to increase anytime soon. The main buyers of oil are likely to be G20 governments filling up strategic reserves with cheaper oil.

Besides, OPEC countries are likely to cut production of their heaviest crudes first. This is because they already sell for less than lighter grades. Refineries and markets in residuals fuels could see an increase in prices. This may help to steady BP’s share price slightly. But, it won’t likely have a huge effect on the rest of its businesses. 

With market-driven supply already down in the US, it could be that OPEC+ countries try to use this time to increase their market share. This means more cuts may be unlikely anytime soon. And some analysts already believe Sunday’s cuts are too little too late.

Once strategic storage reserves have been maxed out, the market will have to rebalance. And that will mean low oil –and share – prices for the future.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rachael FitzGerald-Finch holds shares in BP and Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »