The BP (LSE:BP) share price has fallen 25% over the last 12 months, making the stock one of the FTSE 100’s worst performers. The business, however, has recently set out in a new direction.
Uncertainty over the outlook for oil prices has been a source of recent volatility. But analysts seem to think there’s reason for optimism about where the stock could go in the next year or so.
Price targets
From what I can see, analysts have price targets between £4.32 and £6.54 for BP shares over the next 12 months. With the stock below £4 as I write this, it looks like a terrific opportunity to consider.
Unfortunately, it’s not quite as straightforward as this. One thing to note is that the outlook for oil stocks depends heavily on the price of oil – which can be very volatile.
BP offers investors a handy way to think about the impact of changes in the oil price. As a rule, they suggest that a $1 move in Brent crude translates to a $340m shift in pre-tax profits.
The big question for investors is therefore whether the average price of oil will go up over the next 12 months. It might do, but there are some big risks to that thesis.
Oil outlook
Saudi Arabia is a good example. It’s the world’s second-largest producer of crude oil, but it has cut its production to Covid-19 levels to limit supply and support higher prices.
If the country decides to increase its output – which it’s showing signs of doing – oil prices could fall from their current levels. And this could cause a drop in profits for the likes of BP.
In that scenario, I’d expect price targets for the stock to come down. That’s why I wouldn’t buy BP shares just because of what analysts think – they might well change their minds.
A fall in oil prices isn’t inevitable – an economic recovery in China could boost demand. But investors should assess that for themselves, rather than relying on analyst price targets.
Taking the long-term view
There’s a lot more that could weigh on the oil price over the next 12 months. And that makes trying to assess where BP shares might go relatively tricky.
Over the longer term though, I think things are a bit clearer. Until the technology for generating and storing renewable energy improves, I expect demand for oil to keep growing.
BP has recently shifted its focus to shareholder returns. And if higher oil prices mean greater profits, a combination of dividends and share buybacks should help move the stock higher.
Geopolitical uncertainty means I’m expecting a volatile outlook, rather than a steady climb. But a positive view on the outlook for oil makes me optimistic about the BP share price over time.
A buying opportunity?
BP is on my list of stocks to consider buying, but it’s not at the top of that list at the moment. There are other FTSE 100 stocks that I think are better value at the moment.
If the stock continues to fall, though, that could change in the near future. And while I wouldn’t like to predict the next 12 months, I’m positive on the long-term outlook.
