The world’s oil majors have enjoyed a handsome share price uplift over recent weeks as fears over supply disruption in the Middle East have driven crude values to multi-year highs.
Previously, fear of fresh military action was the primary driver for energy prices, but more recently, fears that President Trump was about to spike US involvement in Iran’s nuclear non-proliferation deal has given the Brent benchmark fresh fuel. The realisation of this news and the subsequent imposition of new sanctions has helped drive the crude price above $77 per barrel for the first time since 2014 today.
Against this backcloth, BP (LSE: BP) has seen its market value swell more than 20% over the past week, with a recent surge past the 560p per share marker on Wednesday taking the crude colossus to its most expensive since the turn of the decade.
However, I remain far from convinced over the sustainability of the current party in the oil market, and reckon that BP’s recent share price surge leaves it in danger of a severe reversal once the froth surrounding tensions in the Middle East inevitably die back.
Saudi Arabia has vowed to step in to plug any supply shortage caused by the fresh US sanctions on Iranian energy shipments, mitigating the impact on overall OPEC supplies. Besides, there is no sign that European signatories to the nuclear proliferation deal are prepared to follow Washington’s course of action. And demand for Iran’s oil from China is not likely to be hit either.
OPEC questions
I have covered the impact of surging North American shale output on wider crude values in the years ahead in some detail before. This is not my only concern though, as while the OPEC and Russian output freeze is supporting values right now, I remain worried about the sustainability of the Middle Eastern bloc’s current accord.
Indeed, Iranian oil minister Bijan Namdar Zangeneh told the state-run Shana news network in recent days about the country’s determination to keep a “reasonable” oil price, underlining the strategic faultlines between lawmakers in Tehran and Riyadh.
Now City analysts see no obvious reason for panic, and they are expecting robust oil values to deliver earnings growth of 177% and 4% at BP in 2018 and 2018 respectively. In my opinion though, a forward P/E ratio of 16 times does not fairly reflect the very real possibility of a sharp reversal in energy prices sooner or later. I would be happy to cash out of the FTSE 100 oil giant after its strong share price run.
Bricking it
I would be very happy to shift out of Purplebricks Group (LSE: PURP) too, despite the vast potential of its global rollout programme.
As my Foolish colleague Alan Oscroft pointed out recently, the vast cash injection given to the company from real estate giant Axel Springer provides its expansion scheme in the US with plenty more vim.
However, fears abound that Purplebricks is stretching itself too far and too soon in overseas territories, and this impatience could see its foreign growth plans eventually falter. This is not my only concern either, with the flagging UK marketplace exacerbating my bearish view — the firm warned in March that revenues would fall short of full-year expectations due to these pressures.
I think there are much safer shares out there to deliver strong long-term shareholder returns than Purplebricks.
