Shell (LSE: SHEL) shares were always likely to benefit from the conflict in Iran. The same goes for FTSE 100 rival BP (LSE: BP). So what’s happening?
At the start of March, a barrel of Brent crude traded at roughly $73. Just a few weeks ago there was talk of it slipping below $60, even possibly touching $40 this year. Now it’s pushing $106. And if the crisis drags on, some analysts think oil could surge to $150, or even $200.
Nitpickers will point out that BP and Shell shares aren’t pureplays on the oil price. Both are huge global businesses involved in refining, chemicals, trading and renewable energy, as well as crude production. Even so, when oil prices move sharply, their shares usually respond accordingly.
FTSE 100 winners
We saw that during the energy shock after Russia invaded Ukraine in 2022, when both spiked. Over five years, the Shell share price is still up roughly 112%. BP’s climbed about 65% over the same period.
BP’s been held back by its own troubles. Two chief executives exited in quick succession and the group has U-turned on its attempted green transition. Ironically, that’s why I chose BP over Shell in 2024. The shares were trailing and the yield was higher as a result. I hoped the cycle would swing back in its favour.
Today, BP’s one of the brighter spots in my portfolio, alongside defence group BAE Systems. Over the last month, the shares have jumped 15.9%. That turned a £10,000 investment into roughly £11,590. Shell’s done marginally better, rising 17.25% over the same period. That £10k would now be worth £11,725.
Those are big short-term moves, offering investors some relief as markets struggle. Despite the growth, Shell looks reasonably value with a price-to-earnings ratio of 14.2. BP’s headline P/E looks absurdly high at 1,899.9%. However, that largely reflects accounting quirks and sharply reduced reported earnings in the most recent period, rather than a collapse in the underlying business.
Windfall tax threat
Of course there are risks. If the Iran crisis eases quickly, oil prices could fall just as fast and energy shares may retreat. Alternatively, if oil giants end up banking huge profits, pressure could grow for windfall taxes.
Before the Middle East crisis, both BP and Shell were warning of falling oil prices. On 5 February, Shell reported a sharp drop in quarterly earnings, although it still pledged to return $3.5bn to investors via share buybacks.
Five days later, BP paused its $750m quarterly share buyback, saying it needed to strengthen its balance sheet. Oil prices aren’t weak now, so let’s hope that buyback returns. Today, BP has a higher trailing yield of 4.6%, compared to 3.2% at Shell.
In the short term, the direction of BP and Shell shares will depend heavily on events in the Middle East. Over the longer term, the tragic crisis reminds us that oil & gas still play a key role in the global economy. I think both companies still merit consideration for a well-balanced portfolio.
