The BP (LSE: BP) share price has had a great start to the week. As I write, it’s the biggest mover on the FTSE 100, up 4%. The OPEC+ decision to cut production by around 1m barrels of oil a day, is leading to concerns that supply won’t keep up with demand.
OPEC back in control?
The surge in a barrel of oil to $84 on the back of the OPEC+ decision, in my opinion, provides an early indication that the cartel is once again beginning to reassert its dominance in global energy markets.
Only last month leading exploration and production companies in the US were warning that supply-side constraints were becoming severe. As the Devon Energy CEO put it: “We’re just on a razor”.
Since the shale boom topped out in 2014, capital investment in the oil industry has been steadily declining. Consequently, the ability of the US to bring on new supply quickly is now much diminished.
If production in the US stays flat, then the inevitable outcome is increased oil price volatility, as today’s price surge aptly demonstrates.
Structural forces
When one considers where the price of oil is today, investment should be flowing into the space. But it’s not. I see many reasons for this.
First, bumper profits being made by the likes of BP, Shell and Exxon Mobil aren’t being used to search for oil. Instead, shareholder pressure means that most is being deployed in dividends and share buybacks.
Second, tightening monetary conditions have made access to capital challenging. On top of this there’s no incentive for companies to invest either. If oil is a dying industry, as so many believe, then it makes no sense for companies to engage in multi-year capex exploration projects. After all, who wants to be left with stranded assets?
Finally, there’s pressure from government and ESG (environmental social and governance) mandates. This is undoubtedly detrimental to the industry on many fronts. But one that isn’t on most people’s radars relates to attracting talent. What young person is going to want to study geology and related subjects at university, in such an environment?
Is BP a buy?
As the above information has shown, investing in oil and gas polarises opinion. Some see parallels with the tobacco industry. Clearly, surging dividends and buybacks lend some credence to this argument.
But in my opinion, notions that the industry is uninvestable and is in long-term decline are wrong. What the last few years have taught us is the world will need black gold well into the future.
Energy security has moved right to the top of the political agenda. The reality is that there are no easy solutions, only trade-offs.
BP is positioned to capitalise on the structural trends. It has a blended portfolio that will enable it continue to exploit volatility in energy markets, while also investing in renewables and low-carbon technologies. That’s why in only the last couple of weeks, I bought more of its shares for my Stocks and Shares ISA.
