It seems odd to ask whether the BP (LSE: BP) share price is set to crash, given that it’s been soaring with the oil price. Yet I think there’s a serious chance it could happen.
I’d like to add BP to my portfolio, but I’m wondering whether to bide my time. Its shares are up a blockbuster 172.25% over three years, and 11.36% over the past 12 months. I feel like I’ve missed the party.
The rally began in spring 2020, after Western nations slapped sanctions on Russia following Vladimir Putin’s brutal invasion of Ukraine. That triggered the energy shock, sending gas and oil prices to the stars. BP breaks even with oil trading around $40 a barrel. So when Brent crude is up to $80 or $90, the cash really starts to flow.
A good strong run
BP posted pre-tax profits of more than $15bn in both 2021 and 2022. Since January 2022, it has paid total dividends of £6.5bn and spent a further £13.6bn on share buybacks, giving shareholders £20.1bn in total.
This is a brilliant return, yet there have been signs of a slowdown, with recent Q3 profits falling to £2.7bn (markets had expected £3.3bn).
The Israel-Hamas conflict has since driven the oil price back up to $90 a barrel, and ramped up the fear factor. The World Bank has just warned oil could rocket to $150 on supply disruptions. This would make now a brilliant time to buy BP because it’s obvious where its shares would go in that scenario.
Despite the brutal events in Gaza, Brent crude has fallen to $88, and could have further to slide, according to Norbert Rücker, head of economics and next generation research at Swiss bank Julius Baer.
He doesn’t expect the Gaza conflict to spread and draw the US and Iran into direct confrontation. Instead, he remains confident that “the conflict most likely follows the usual geopolitical playbook, remaining a temporary shock.“
War-war or jaw-jaw?
Rücker notes that the big regional players seem keen to avoid war. Oil prices “seem detached from soft fundamentals” and should soon start to “deflate“.
Talk of supply shortages also look overdone, within US oil storage close to seasonal norms and Chinese crude oil stocks rising. Despite supposed sanctions, “Russian oil flows freely, Iranian exports swell, and Venezuelan output picks up,” Rücker concludes.
I’ve always been wary of buying stocks based on macroeconomic or geopolitical predictions. One misguided rocket could sink Rücker’s thesis in an instant.
By contrast, the World Bank is playing it both ways. While its $150 oil price warning made headlines, it also said oil could slump to $81 if Gaza tensions don’t escalate. So where does that leave investors and will BP’s price slump?
I buy shares with a minimum 10-year view, so where BP share price goes in the next 10 days or weeks doesn’t matter that much. Today, the shares look good value trading at 6.45 times forward earnings. The 2023 forward yield of 4.38% is forecast to hit 4.7% in 2024. Throw in those share buybacks and BP shares look tempting. It looks like a potential buy to me.
Rather than play guessing games, I will buy when I have some spare cash.
