I reckon the BP and Shell share price slump might be the buying opportunity of the year!

The falling oil price could make now the ideal time to build your stake in FTSE 100 (INDEXFTSE: UKX) oil majors BP plc (LON: BP) and Royal Dutch Shell plc class B (LON: RDSB).

| 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.

It has been a brutal couple of months for the oil price, and for FTSE 100 oil giants BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB). At one point in September, Brent crude was topping $80 a barrel, at time of writing it stands at just $54.25. That’s a drop of a third and many believe it could fall lower still in 2019.

Oil slip

The impact on BP and Shell’s share prices has been predictable. Despite a small recovery in the past week, BP is down 17% from its 52-week high trading at 501p, while Shell is down a similar percentage to trade at 2,330p.

This is yet another disappointment for long-term BP investors in particular, as its share price looked like it was finally about to reach pre-financial crisis highs of 600p. Those holding Shell will also feel frustrated, as the good times looked set to roll after the last oil price shock, which saw it plunge below $30 in January 2016. Three years later are we heading there again?

Feeling Foolish

At the Fool we really like to buy stocks like BP and Shell when prices and sentiment are down in the dumps, as they are at the moment. That way you can pick up your favourite companies at reduced prices, then hold on and wait for them to recover.

It was a strategy that worked last time oil was on the rack: despite this year’s share price slippage, BP still trades around 45% higher than it did in January 2016, while Shell is up around 50% over the same period. Plus you will have pocketed their juicy dividends on top. Or better still, reinvested them to buy more stock.

Well-oiled machines

Both companies weathered the last oil slump pretty well, given the pressure they were under. Both continued to reward loyal investors by maintaining their generous dividends, with Shell keeping up its proud record of never dropping its dividend since the war.

BP can now cover its production expenses with oil below just $50 a barrel, and is aiming to reduce its break-even point to between $35 and $40 per barrel by 2021, by cutting costs and writing off poorer performing wells. This gives it turnaround potential. Shell is already below $40 a barrel. If this was not the case, their share prices would have fallen even further.

Bounce back

The big question is where does the oil price go next? It could slip further in January as US crude oil stocks have jumped from 400m barrels to around 450m, but that trend may soon start to reverse. At these prices, US shale drillers will see their margins pared to the bone, which could cut supply and ease the glut.

The full impact of Iran oil sanctions will be felt by April, when at least a million barrels will be taken from the market. Opec and Russia may also agree to reduce output. If all this happens, the oil price could recover as rapidly as it fell, and now could be the perfect opportunity for long-term investors to lock into BP and Shell’s sky-high yields of around 6% a year.

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 considered so you should consider taking independent financial advice.

harveyj has no position in any of the shares mentioned. 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

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

3 reasons why the Darktrace share price is up 61% over the past month

Jon Smith outlines three of the main reasons in his opinion for the strong bump higher in the Darktrace share…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I snap up GSK shares at £14?

The GSK share price has slumped. Should investors pile in or steer clear? Roland Head investigates.

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

As NIO stock continues to fall, should I buy the dip?

Jabran Khan looks at why NIO stock has dropped in recent months and decides if the shares have fallen enough…

Read more »

Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Investing Articles

How I’d aim for £10,000 a year in passive income, from £100 per month

We'd all like to have a bit of passive income coming in to supplement our retirement, wouldn't we? Here's how…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Here’s a cheap FTSE stock with a 6% dividend yield. Should I buy it?

Vodafone is a FTSE stock with an attractive dividend yield, which looks to be on the path to recovery. Here's…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

As the Centrica share price continues to climb, am I too late to buy shares?

This Fool documents the recent rise of the Centrica share price and decides if adding the shares to his holdings…

Read more »

British Pennies on a Pound Note
Investing Articles

Even at 10p, I see the Cineworld share price as expensive. Here’s why

The Cineworld share price has crumbled to around 10p. But the cinema chain still holds no appeal for our writer…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Should I buy Aviva shares now?

With Aviva shares near 440p, here's what I'd do about this stock now as the business throws off cash and…

Read more »