Accurately predicting the BP (LSE:BP.) share price from one week to the next isn’t easy. As for looking five years ahead, well, it’s virtually impossible.
Then and now
However, I recently stumbled across an article on The Motley Fool that was written on 24 May 2020. It had the headline: “Where will the BP share price be in 5 years?”. And guess what? The writer was pretty accurate. They wrote: “Looking ahead, I’d say that the BP share price is probably fairly valued at the moment”.
At the time, the energy giant had a market cap of around £63bn. This month (May), it peaked at just over £61bn. Within the normal bounds of forecasting, I think this was a pretty good prediction.
The author’s Nostradamus-like skills were also evident when they wrote: “I think a dividend cut is necessary – perhaps a 50% reduction.” Indeed, it was subsequently halved during the second quarter of 2020. Again, that was an excellent prediction.
And if that wasn’t good enough, the writer said the group’s share price could hit 500p, if oil prices started to increase. Indeed, in February 2023, following Russia’s invasion of Ukraine, Brent crude spiked and BP’s share price broke through the £5-barrier.
Impressive stuff.
I’m going to spare the author’s blushes by not naming them but, to give you a clue, they are still writing insightful articles today.
Time to start polishing that crystal ball
Okay, it’s my turn now.
With the majority of BP’s earnings coming from oil (as opposed to gas), it stands to reason that the price of ‘black gold’ is going to have a big influence on its profit.
As the table below shows, there’s a strong positive relationship between the oil price and the level of cash generated. This tells me that the company’s share price is also closely correlated.
| Year | Brent crude price ($/barrel) | Operating cash inflow ($bn) |
|---|---|---|
| 2018 | 71.2 | 22.9 |
| 2019 | 64.3 | 25.8 |
| 2020 | 42.0 | 12.2 |
| 2021 | 70.9 | 23.6 |
| 2022 | 100.9 | 40.9 |
| 2023 | 82.5 | 32.0 |
| 2024 | 80.5 | 27.3 |
Brent crude is currently at $64 a barrel. It’s recovered a little in recent weeks but it’s still comfortably below pre-‘Liberation Day’ levels.
But the prevailing price depends on the interaction of buyers and sellers. In particular – as we have seen with the uncertainty created by President Trump’s trade policy — demand will be affected by global economic conditions.
What I did
I recently took a position in BP as I believed the oil price wouldn’t remain at its current level for long.
According to the International Monetary Fund, Saudi Arabia needs it to be at $90 for it to balance its budget. And as the biggest OPEC+ producer, it will have a major influence on the price. However, some believe the country’s preparing for the worst and is planning to cut spending on infrastructure products.
I was also tempted by the stock’s above-average yield, which is currently (23 May) 6.6%. But I’m aware of the challenges facing the sector. There are numerous industry-specific financial, operational, and environmental risks.
The truth is that nobody has a clue where the oil price will be next month, let alone in 2030. On reflection, I think the BP share price will be higher than it is today – history suggests Brent crude will bounce back soon — but I’m not going to make any firm predictions. That way, I won’t be embarrassed if someone finds this article in five years’ time.
