It’s perhaps a surprise that the BP (LSE: BP) share price has performed so resolutely in recent days. The oil giant was unchanged during the past trading week, despite soaring fears over the economic recovery. Classic cyclical shares like this are usually the biggest fallers when macroeconomic news shakes investor nerves.
By comparison, the FTSE 100 dropped 2% between Monday and Friday. Dip buyers might be therefore looking for other blue-chips to invest in today. However, on paper, the BP share price still offers value that’s worth taking notice of.
The UK oil share trades on a forward price-to-earnings (P/E) ratio of 7 times. That’s far below the FTSE 100 corresponding figure above 16 times. Furthermore, BP’s dividend yield of 5.3% for 2021 smashes the Footsie average of 3.4%.
Oil supply creeps higher
BP’s share price has been kept afloat this week, thanks to robust crude prices. The Brent benchmark has remained strong, around $72 a barrel, despite shaking investor nerves. This is thanks to fears of severe supply issues related to Hurricane Ida off the Gulf of Mexico.
However, there’s a raft of supply-related issues that lead me to believe that oil prices could soon start to decline. First off, is news that China plans to sell oil from its state reserves for the first time to alleviate strong prices and help local industry.
Meanwhile, the influential OPEC+ oil cartel is taking steps to turn the taps up. It plans to produce 400,000 more barrels a day each month until the end of 2021, at least. Finally, the US oil rig count continues to grow and, in August, the number of operating units rose for the 13th straight month.
Falling demand to hit BP’s share price?
At the same time, worries over oil demand continue to grow. In its latest Short Term Energy Outlook report, the US Energy Information Administration (EIA) reduced its demand forecasts by 500,000 barrels a day for the third quarter. This is because of the impact of the Delta variant in driving Covid-19 infections higher again, it said.
Recent news flow leads me to fear that forecasts could be steadily scaled back too. The latest EIA inventories report showed a 1.5m barrel drawdown in US oil supplies last week. That was far short of the 5.9m barrel reduction analysts had been predicting.
The verdict
On the plus side, expectations that the US dollar will weaken support the outlook for oil prices. A falling greenback makes it more cost effective to buy commodities denominated in the US currency. It’s also worth mentioning that BP’s effective cost-cutting should help insulate it against any oil price reversal. Margins at the business are currently at their highest for a decade.
Still, I can’t help but worry about the BP share price in the short-to-medium term. And the rising use of green energy casts a huge shadow over a longer time horizon too.
I’d much rather buy other lower-risk FTSE 100 shares today.
