The price of oil has been soaring recently, as demand continues to be greater than the supply. This is mainly due to the tragic Ukraine-Russia conflict. Yesterday, worries about the Caspian pipeline disruption, which would restrict supply further, pushed oil to beyond $120 per barrel. This far exceeds its pre-pandemic prices.
Further, it has allowed the BP (LSE: BP) share price to reach close to 400p, double its lows during the pandemic. Such a high oil price has also led to greater interest in oil stocks. For example, in the US, Warren Buffett has recently opened a position in the US oil giant Occidental Petroleum to profit from the high oil price. Therefore, should I be applying this reasoning to UK oil stocks, and open a position in BP.
Why is Warren Buffett investing in oil?
The simple answer to the question of why Warren Buffett is buying an oil stock is because the price of oil is soaring right now. Even so, I don’t think this fully answers the question. Indeed, Warren Buffett is known for his long-term outlook, and doesn’t invest for short-term profits. He’s also a long-term investor of Chevron, showing that he has favoured oil stocks in the past.
Using this logic, it seems that Warren Buffett believes that demand for oil will stay strong well into the future. In many ways, this could be true. For instance, there’s a growing population, and the green transition will be a very long process. Provided that oil can stay around $70 per barrel, these oil companies will also be able to provide very strong shareholder returns.
But I’m slightly less convinced, especially as US oil stocks have limited plans for transitioning to green energy. In fact, I believe that the price of oil is unsustainable at its current prices, and a large fall-back is due over the next few years. In this respect, there’s a risk that the BP share price may fall alongside all other oil stocks.
Does the BP share price have further upside potential?
While the BP share price has performed well recently, it has also slightly underperformed other oil stocks, especially those in the US. This is mainly due to BP’s forced disposal of its 19.75% stake in Rosneft, a Russian oil major. This is going to lead to a $25bn hit for the company, alongside hurting profits for the foreseeable future. But I think that positives can be found from this forced divestiture, even though it hasn’t come at a great time. Indeed, Rosneft was a pure oil play, and was inconsistent with BP’s aims to transition into greener energy. For me, such a transition is vital to the firm’s long-term future.
As such, while I’m not following Warren Buffett into oil stocks, due to the potential for the oil price to sink over the next few years, BP does still tempt me. Indeed, the current high price of oil will help it produce healthy profits, while in the long term, the transition to greener energy is well under way. Even so, there are other FTSE 100 stocks that I feel have more long-term potential, so I’ll watch the BP share price from the sidelines for now.