The BP (LSE: BP.) share price has been rising slowly over the past few months and is now 26% higher than the low reached back in April. After some initial scepticism following its strategy reset earlier in the year, analysts and investors are turning increasingly bullish on the stock.
For me, any investment case for BP needs to be grounded in two scenarios. Firstly, that oil and gas prices are heading higher and secondly that demand for hydrocarbons will continue to grow.
Deglobalisation
One of the most important macro forces to emerge over the past 40 years has been increasing globalisation. When China entered the World Trade Organisation in the early 2000s, and assumed the role as the manufacturing hub for the global economy, the trend accelerated.
Over the past 10 years, however, clear signs have begun to emerge that this trend is beginning to reverse. Such a profound change to the pipework of the global economy is likely to have significant ramifications for energy markets.
Demand shocks
Measured in the short term, oil and gas supply is highly inelastic relative to demand. The reason for this is because producers cannot just turn on the taps and extract more oil overnight. It is both time consuming and costly to find new supplies.
Therefore, inventories above ground can shift rapidly from oversupply to acute shortage in a matter of weeks, as a result of a demand shock.
As countries turn increasingly inward, trade barriers get erected and energy alliances evolve, oil’s role as a key strategic asset will increase.
As deglobalisation trends accelerate, I foresee a world where demand shocks become more frequent, which believe it or not use to be the norm in the distant past.
AI revolution
One demand shock that could very well be on the horizon is from the exponential increase in energy demand coming from data centre expansion, powering generative AI models.
A recent study by consulting firm McKinsey, estimates that global energy demand could grow by up to 18% by 2050. But even this estimate could be way off, as the true extent of energy demand coming from data centres emerges.
Some of the estimates out there are truly frightening, particularly with regard to electricity consumption. It is little wonder that in their search for cheaper, readily available and scalable sources of energy, that the likes of Meta and Microsoft are turning to natural gas.
BP itself has described present natural gas demand as “crazy” and is fully expecting this to continue for the next decade.
Recession fears
As oil hovers around the mid-$60 range, the energy market is clearly pricing in a recession. One thing is for sure, the US economy does not look as rosy as it did a few months ago. Remember, the main reason why the Federal Reserve is expecting to cut interest rates this week is because it fears the economy is weakening.
Yes, oil prices could fall if a recession does come. But with a breakeven of $40 (way less than the US shale producers), I believe its depressed share price more than factors in this risk. For me, oil prices are heading higher over the long term, which is why I continue to accumulate BP shares at every opportunity.
