In some respects, forecasting the BP (LSE:BP.) share price is quite easy. When energy prices are high — particularly oil – the stock generally rises. Conversely, the energy giant’s market-cap tends to drop when prices fall.
Anyone wanting evidence of this only has to look back five years. At the height of the pandemic, when energy consumption fell sharply, BP’s shares dropped below 200p. By February 2023, after a period of high oil and gas costs following Russia’s invasion of Ukraine, the group’s shares were changing hands for 560p.
Today (25 June), an investor could buy one for 368p.
On the other hand…
But this is only half the story. That’s because accurately predicting commodity price movements is impossible. There are numerous political, economic and environmental factors that help determine prices, most of which cannot be foreseen. And because of this, I think we need to treat analysts’ forecasts with some scepticism.
However, for what it’s worth, the consensus 12-month share price target is currently 399p, an 8.4% premium to today’s value. The most positive reckons a fair value for the group’s shares is 648p. By contrast, the least enthusiastic claims 339p is justified.
But none of these ‘experts’ know how oil and gas prices will move over the next year or so, which makes me wonder why they bother going to the trouble of preparing detailed financial models.
And if little reliance can be placed on these forecasts, how can an investor make an informed judgement about whether to invest or not?
Personally, I think it’s necessary to take a step back, ignore weekly price movements and take a long-term view.
The bigger picture
Undoubtedly, there’s a shift away from the use of hydrocarbons. Demand for fossil fuels will therefore fall. But we are not there yet.
For example, there are numerous estimates as to when ‘peak oil’ is likely to come. However, the precise date doesn’t really matter because very few are expecting demand to drop sharply thereafter.
So even in a ‘greener’ world, we will still need oil and gas, with the former used in the manufacture of chemicals and the latter still helping to generate electricity. And not everyone will be driving electric vehicles.
As part of this transition, BP’s investing in wind and solar energy, as well as carbon capture and storage. Although it’s announced plans to slow its spending on renewables, clean energy solutions will be an important part of the group’s product mix over the coming decades.
But there could be one unintended consequence of the move to Net Zero. Attempts by governments to restrict the level of investment in new oil fields could backfire.
ExxonMobil claims that without the granting of new licences, a global shortage of oil will result. It says a permanent 15% loss of output would result in a 400% increase in the oil price. Of course, as America’s largest energy company it has a vested interest in making such a claim. But restricting supply could lead to price rises if demand doesn’t fall as expected. Just imagine the impact on the sector’s earnings under this scenario.
On balance, I think a long-term investor could consider adding BP shares to their portfolio. But they should be prepared for regular periods of volatility as energy prices continue to peak and trough.
