BP (LSE: BP) has long been a star FTSE 100 stock but has lost 20% from its high this year. Part of this drop seems to be due to some investor bias against oil companies.
Another part is due to a misunderstanding of the key drivers of the oil markets at any given time. The final part is not appreciating that BP can profit as much when oil prices fall as when they rise.
Anti-oil sentiment misses a key point
Many people, including those in the oil industry, have great sympathy with the climate change movement. Most of these, it seems to me, favour the idea of a graduated transition from fossil fuels to green energy. And no companies are in a better position to manage this transition than the big energy companies.
BP itself has pledged to become a net zero company by 2050 or sooner. It has announced plans for a 25% cut in oil and gas production by 2030. And it is looking to provide a smooth transition to cleaner energy while avoiding interim energy shortages.
The oil market is a fickle one
Many factors affect oil prices, from simple supply and demand to complex geopolitics. At any given time, though, one or two are the particular focus of traders. Right now, China’s economy is one, and the upcoming meeting of the OPEC+ oil cartel is the other.
China was the key driver of the 2000/14 commodities ‘super cycle’, characterised by rising commodity prices, including for oil.
Economic activity in China has slumped in the past two years due to Covid. On 31 May, disappointing manufacturing figures came out of China, pushing oil prices down.
But far more important for me is that China recently announced a 5% economic growth target for this year. And China’s President Xi Jinping has staked his reputation on it.
Similarly, the OPEC+ cartel is due to meet on 4 June. It may well cut its combined oil output, which would be bullish for oil prices.
Profiting in all market conditions
But whether OPEC+ does this or not will be irrelevant to companies such as BP.
It is not just an oil firm — it is one of the major players in trading the global energy markets. It enjoys unparalleled access to timely data on shipping routes, cargo pricing, and production and supply. And it has trading teams expert in risk management techniques, including hedging and shorting.
Hedging, of course, involves making trades designed to mitigate risks in existing positions. Shorting means selling something now with the expectation of being able to buy it later at a lower price.
This is how BP can make just as much money if oil prices go down as if they go up. According to industry estimates, BP’s trading teams made around 14% of the group’s entire earnings in last year’s results.
One risk for me in the share price is that anti-oil protests might cause BP to expedite its energy transition. This could cause failures in its energy delivery networks. Another risk is to its infrastructure in some high-risk regions in which it operates.
However, I already hold positions in BP and am very happy to keep them. If I did not, then I would buy the shares now for their likely dividend and share price gains.