BP (LSE:BP) is a titan of the FTSE 100, so much so that fluctuations in its share price often help drive the wider index up or down.
The performance of the company’s share price is inherently linked to the price of oil. As such, before I explain why I’d buy BP shares for my portfolio if I had spare cash, it’s worth taking a brief look at this vital commodity.
The oil market
Crude oil is one of the world’s most important commodities. In fact, its price often has a ripple effect on the broader economy.
Higher oil prices mean higher petrol prices at the pump, higher shipping costs, and increased input costs for producers.
Like most other commodities, oil is bought and sold on international markets. Accordingly, its price fluctuates based on supply and demand.
In March 2022, oil prices soared to highs not seen since 2008. This came as a result of the Russia-Ukraine war, which increased concerns about a shortfall in global supplies from Russia.
Nonetheless, from last June onwards, the trend has been almost entirely downward.
So, what does this mean for BP shares?
A rising but cheap share price?
In 2022, the BP share price performed strongly, rising by around 30%. Surprise surprise, this largely reflected higher oil prices.
What’s more, the share price is currently up an impressive 65% since the beginning of 2021.
Nonetheless, BP’s price-to-earnings (P/E) ratio is estimated to stand at around 4.5. To put this into perspective, Shell‘s P/E ratio is approximately 6.75.
To me, this suggests BP shares could still offer significant value. Here’s a brief look at why.
An outstanding 2022
BP’s profits more than doubled last year to an eye-watering £23bn. That was the best result in the company’s 114-year history.
The supermajor’s mega performance reflected a 48% average increase in the price of oil and gas achieved for its oil production and operations.
In the short term, BP expects oil prices to be supported by a combination of improving Chinese demand and uncertainty surrounding Russian exports.
Challenges and uncertainties
Despite a cracking performance in 2022, challenging times and a level of uncertainty lie ahead.
For starters, I’ll be keeping a close eye on the sustained downward trend in oil prices. Combined with the slowdown of the global economy in 2023, the risk of volatility is real.
Moreover, given the firm’s ambitious investment plans, there are major demands on cash the company needs to cautiously consider.
Not least among those demands is the carbon emission reduction target. After all, if mainstream investors aren’t convinced of its ESG credentials, I think BP’s long-term valuation could be be severely impacted.
A bright future outlook
However, I’m more confident that BP’s plans to increase exposure to renewable and lower carbon energy sources will pay off in the long run.
The company recently released a strategy update confirming up to $16bn of investment up to 2030. This will be split evenly across projects in oil and gas and the energy transition.
Becoming greener without sacrificing strong investment returns is a problem facing every company in the industry, but I think BP is best placed to accomplish it.
That’s why, if I had some cash to spare, I’d buy BP shares for my portfolio today and be happy to hold them for as long as possible.
