The Oil Price Is Slowly Creeping Up. Will BP plc And Royal Dutch Shell Plc Follow?

It’s tough to make predictions, especially about the future of the oil price and its impact on BP plc (LON: BP) and Royal Dutch Shell Plc (LON: RDSB), says Harvey Jones

| 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.

I always enjoy it when Goldman Sachs’ crystal ball loses its much-vaunted mystical powers, as it regularly does.

Earlier this year, it forecast that oil would fall to $40 a barrel over the next couple of quarters. At time of writing, West Texas Intermediate is trading at more than $61 a barrel, while Brent Crude is pushing $70.

Crude Facts

The resurgent oil price has taken many by surprise but there was always some degree of inevitability about it.

Depressed prices had the predictable impact of closing down the more expensive US wildcat shale drillers and hitting oil exploration investment generally, which was bound to knock supply at some point.

Although US commercial crude inventories remain close to an 80-year high, they have thinned lately, falling by 3.9 billion barrels in the week to 1 May.

That was the first drop since January, and double the anticipated fall.

Drive Time

The recent fall in the dollar was also to blame, making oil cheaper for those buying in foreign currencies, and stoking demand.

Saudi Arabia’s decision to increase prices for its European customers in June, while holding them flat in Asia, fuelled the upwards price trend.

Saudi needs to keep some of its oil for itself, to fuel peak electricity demand in its baking hot summer. And with the US driving season almost upon us, many investors would expect recent price rises to accelerate further.

Major Money

A 25% rise in the BP (LSE: BP.) (NYSE: BP.US) share price to 464p since its mid-February lows would suggest that the FTSE 100’s oil majors are benefiting from the crude fightback.

But it hasn’t helped Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), whose share price has stalled in recent months.

Both producers have been hit hard by last year’s halving of the oil price, with Q1 revenues down 57% and 56% respectively.

Rising production, falling capex and profitable downstream operations all offset some of the damage, but what both stocks really need now is a continuing rebound in the oil price.

Nobody Knows

Further progress could prove tricky, however. Stockpiles are still close to record highs. Saudi continues to pump well above its quota. Iran will be keen to get its oil to market, once sanctions eased.

And $70 oil will bring back the shale drillers.

Some analysts claim crude could fall to $20 a barrel, as it comes into line with gas prices. They may be right. Or like Goldman Sachs, they may be wrong.

Buy BP and Shell for their yields, currently 5.13% and 5.46% respectively. Don’t buy them because you think you know where the oil price is going. As Goldman Sachs has shown, nobody does.

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.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

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 »