BP (LSE:BP) shares have sunk 15% over the last month as investors weigh up economic forecasts and its impact on oil producers.
I’ve been holding off buying shares in oil and mining stocks this year. However, they went from strength to strength before commodities started showing signs of weakening in the last few months.
But I see both positives and negatives. So, here are two reason for me to buy BP shares, and two reasons not to.
Reasons to buy!
An era of scarcity: I think that we’re entering an period of scarcity, in the medium-to-long term, that will be characterised by higher commodity prices and increased competition for resources. This will push up prices and should have a positive impact on the profitability of oil and gas operators.
The oil price is the core factor impacting profitability at these companies. At the moment, we’re seeing that OPEC nations are struggling to increase production to meet demand. This has been a factor driving oil prices higher in the short term, but in the long run, a lack of investment in resource exploration, partly brought about by pandemic-linked capex cuts, may exacerbate shortfalls.
A lower break-even point: In 2020, BP said it was attempting to reduce its break-even price to $35 a barrel by 2021. Many oil and gas producers embarked on programmes to reduce their per-barrel costs following the 2016 oil price crash and the pandemic. This means BP and its peers are better prepared for falling oil prices than they have been in the past.
Reasons to avoid BP
Near-term pressure: I invest for the long run and I think that there may be better entry points for BP shares later this year. Oil has been pretty volatile in 2022 and predictions for where it will go next are all over the place.
Analysts at Citi Group said oil could collapse to $65 a barrel by the end of this year and slump to $45 by end-2023 if a global recession occurs. Right now, that looks very possible amid negative economic forecasts in the West and Chinese lockdowns. However, JP Morgan analysts have suggested that benchmark prices could hit a $380 a barrel depending on what Moscow does to retaliate against the West. Either way, there’s too much uncertainty, I feel.
Long-term shifts away from hydrocarbons: The movement away from hydrocarbons is part of BP’s strategy. But it’s an expensive one. The company has recently promised to spend more on low-carbon energy alternatives and invest more than £2 for every £1 it made in Britain this decade.
But massive shifts like this are risky. A business model that has been very successful for almost a century is being replaced. We just don’t know what oil companies will look like at the end of the transition.
My take
So should I buy? I think not… for now. I won’t buy BP stock yet as I think there will be better entry points later in the year. And as I believe we’re entering that period of scarcity for the long run, I’ll consider buying if the share price falls further.
