The COVID-19 panic-driven market crash hasn’t spared any stock. But some FTSE 100 stocks have had it much harder than others. I’m talking about the oil biggies. The share price for BP (LSE: BP) has more than halved since the start of 2020. It would’ve lost some value anyway as it got dragged down by the overall market crash, but the sharp drop in oil price has impacted it even more.
Crude oil price touched its lowest level in 17 years during the week. At any other time, oil price at sub-$30 levels a barrel would be great for the global economy. It would slash costs for business across sectors and improve the trade balance for oil importing countries, which would create even more positive spillover effects. But not right now. Not when businesses have come to a screeching halt to fend off coronavirus.
Oil turnaround will benefit BP
Yet, I think it’s a good idea to consider buying BP now, as contrarian as it may sound. Here’s why. Despite oil price setting by OPEC (Organisation for Petroleum Exporting Countries), the fact is that it still responds to demand conditions.
Demand has been hit recently but it’s only a matter of time before it starts returning. Unlike other times when we have witnessed a weak economy, the return of demand in this case won’t be gradual. In fact, it could be quite a sharp return, as travel bans get lifted, traffic returns to the roads, and business starts functioning as usual. I reckon oil prices will rise along with this, creating better conditions for oil companies.
FTSE 100 maybe bottoming out
The next question is, when will it happen? And the answer is, no one knows. From what I read, controlling the coronavirus could take at least a few months. This will result in more economic erosion in the near term as businesses continue to suffer.
But financial markets could begin to see a pickup before that. In fact, they already have. Since the daily fall in FTSE 100 that started on 5 March and culminated into a dramatic 11% drop in five trading sessions, things have been relatively better. In the past week, the FTSE 100 has ended up higher compared to the day before in three of five sessions. It’s still falling on average, but the extent of the fall is getting contained.
It’s only a matter of time before stock markets start inching up, barring any adverse developments. Markets are going to be flush with liquidity in the ensuing days, with all the requisite support coming in from policy. Stock prices will start rising.
The time to start investing is now. At the time of writing, BP’s price is already up almost 10% from yesterday’s close. Moreover, its dividend yield is now at 14.8%, which is over twice what it was in January. It’s worth considering at the very least.
