BP (LSE:BP) shares are among the best performing on the FTSE 100 in 2022. In fact, over the past 12 months, the energy giant has seen its share price rise 42%. And over two years, the stock is up a phenomenal 74%.
So have I missed my chance to buy, or will BP go higher?
Post-Covid recovery
While BP operates in a cyclical industry, there’s evidence that we’re entering an era of resource scarcity, characterised by greater competition for things like oil and gas, and higher prices.
During the pandemic, some analysts suggested that demand for hydrocarbons would never recover. But that’s not been the case. And even as we enter a recessionary environment, oil prices have remained at a highly profitable level for oil companies.
Near-term prospects
BP’s profitability depends on oil prices. High prices mean higher margins. At $120 a barrel in the summer, BP’s revenue was soaring. Now Brent Crude is trading for around $82 a barrel. That still gives IOCs like BP, which use ultra-high tech, sizeable margins.
The big question is, where will oil go next?
Well, Brent Crude has recently moved into a backwardated market structure whereby front-month loading barrels trade higher than later deliveries, which indicates worries about oversupply are subsiding.
OPEC recently said it expect oil demand to actually grow by 2.25 million barrels per day (bpd) in 2023. Demand next year would therefore reach 101.8 million bpd driven, in part, by growth in China, the world’s top importer.
However, Goldman Sachs slashed its oil price forecasts for 2023 this week, saying it sees a market surplus early next year. It reduced its Brent forecasts for the first and second quarter of 2023 to $90 and $95 a barrel from $115 and $105 per barrel respectively. This is still above pre-pandemic levels.
So the near-term prospects for this hydrocarbons giant look pretty positive with oil prices set to remain above $80 a barrel.
Long-term prospects
BP is also at the forefront of the energy transition. By 2025, nearly half of the group’s $15bn capital expenditure budget will be channelled into renewable and green energy.
And according to analysts, by 2030, the new green arm of the business could generate as much as $9bn-$10bn in underlying cash profits.
This is important because, as an oil company, BP is a cyclical stock. When demand for oil is strong, the business does well, but when demand wanes, the business struggles. The movement into the green energy market could offer some protection from these fluctuations.
There is, of course, the argument that the green business could prove less profitable and that it’s less tested as a business model. However, I disagree. And new technologies are only making green energy cheaper.
In addition to this, I foresee strong demand for oil in the long run as I contend there will be greater competition for resources over the next decade.
Despite all these positive, I’m still a little cautious about buying. With war waging in Ukraine and Russia on the back foot, and with an unpredictable economic situation in China, I’m concerned oil prices could be rocked by a single event.
So, yes, BP shares could push higher. But, for now, I’m holding off buying.
