The BP (LSE: BP) share price has been extremely turbulent in recent weeks. After reclaiming the 300p marker in mid-January and hitting five-month peaks in the process, it promptly reversed again. At around 258p per share, this UK oil share is basically flat since the turn of the year.
BP’s sprung higher in start-of-week trade, however, as market confidence has improved. Whether or not this jolt of enthusiasm can last longer than January’s mini bull market remains to be seen. But on Monday, optimism surrounding a $1.9trn stimulus package in the US lifted risk appetite across financial markets.
Brent crude’s charge through $60 per barrel has certainly helped BP in particular. The oil benchmark has now recovered all of the ground it lost early last year when the Covid-19 outbreak spooked financial markets. Brent is now dealing at 13-month highs.
Risks remain
Is it possible that BP could continue its northwards charge? It’s not outside the realm of possibility. Signs that central banks and world governments will keep the money printers switched on to aid the economic recovery will certainly help oil demand to rebound. News that crude shipments into China are also spiking bodes well for UK shares like BP too.
I’m not getting too excited about the FTSE 100 oil giant, however. It is still trading at a near-50% discount to what it was at the start of 2020. And this is because the risks to the UK share’s profits column remain significant. One problem is that the fight against Covid-19 is far from over and lockdowns could persist long into 2021 if not beyond. I think the path to a full recovery in oil demand remains laden with danger.
I’d buy other UK shares
On the plus side, it seems that some of the near-term risks posed by a possible supply glut have receded in recent days. Speculation was rife that sanctions on Iran could be lifted. It’s a move that might have released a wave of unwanted oil into the market. But US President Biden last night poured cold water on the idea that sanctions could be rolled back before talks on a new nuclear deal begin.
Still, over the medium-to-long term, I fear the threat of huge oversupply in the oil market. Massive fossil fuel investment across major nations like the US, Brazil, Norway, and Guyana might light a fire under global production levels later in the decade. And of course there is the big problem of green energy for UK oil-producing shares like BP to contend with.
The oil industry’s major players have taken steps to boost their exposure to renewables. BP for instance invested $1.1bn in massive US offshore wind projects in the autumn to increase its green credentials. But fossil fuels will remain the company’s bread and butter for years to come. And this poses a big problem for the Footsie firm’s investors. I’d much rather buy other UK shares in my ISA today despite BP’s huge share price fall in the last year.
