In the face of falling oil prices, the BP (LSE: BP.) share price has remained remarkably resilient. With energy stocks often viewed as inflation hedges, could the market be signalling that BP’s valuation already reflects the worst?
Oil prices
The price of a barrel of crude oil today is trading at lower levels than it was after President Trump unleashed a barrage of tariffs, back in April. Yet the oil major is trading 17% higher than back then.
Such anomalies in the market are something that many smart investors pick up on. Admittedly, earlier in the year there was a healthy dose of scepticism around the company’s strategy reset, which is no longer there.
One reason for the decline in oil prices has been due to a glut in supply. According to the Energy Information Administration, output levels from US oil producers reached a record 13.6m barrels a day in July. This is on top of OPEC rolling back production cuts, despite prices falling.
Contrarian signal
Many these days are bearish on oil. I remember two years ago when gold was in a similar position. But in my opinion, the stage is being set for a major rally in prices.
Indeed, talking about gold, look at the gold to oil ratio. Today, the number of barrels of oil required to buy just one ounce of gold is at one of the highest in history.
Like the gold to silver ratio, I maintain a keen interest in many commodity price ratios, as they help me understand which commodities are cheap.
In my opinion a significant reason for gold’s unprecedented move is down to the bond market sensing that the US economy is heading into stagflation. This is the lethal cocktail of low growth and elevated inflation.
This fact is extremely important for oil. History demonstrates that the commodity thrives in such an environment, as witnessed during the 1970s.
Higher production
Ahead of the release of its Q3 numbers early next month, BP is guiding for a rise in both upstream production and refining margins.
Increased upstream performance is being driven by gas production from BPX energy, its US shale business. I believe a huge amount of this demand is coming from the AI hyperscalers, such as Microsoft.
Natural gas, like oil, I believe is totally mispriced in this market.
Data centres require huge amounts of energy. The hyperscalers are investing heavily in renewables, particularly solar farms. However, it is becoming increasingly obvious that the intermittent nature of such power makes it unreliable as a base-load source of electricity for data centres’ significant needs.
With nuclear power seen as very much a longer-term solution, such companies are increasingly turning to natural gas. This can be seen by the fact that gas turbine manufacturers, such as Siemens, have witnessed an explosion in orders.
Bottom line
Being a contrarian investor just for the sake of it is not a good investment strategy. But there are times when one should think like a contrarian, and I believe that time is now for oil.
The oil major’s strategy reset back in February is now beginning to bear fruit. For investors looking for inflation protection, and who may have missed gold’s rally, then BP is worthy of further research.
