After a huge move higher over the last year, BP (LSE: BP.) shares have suddenly lost their momentum. Had an investor put £5,000 into the oil giant two days ago when its share price was at 600p, that capital would now be worth about £4,775.
So, is it game over for the rally here? Or is this just a temporary pullback?
Following the oil price
It’s not hard to see why BP shares have rallied recently, and why they’ve now dropped. This year, the price of oil has spiked amid the conflict in the Middle East and the shuttering of the Strait of Hormuz – a vital oil transportation route.
On several occasions, Brent Crude oil has traded near $110 per barrel, after starting the year near $60. That price level obviously translates to much higher profits for oil producers like BP.
However, since the US and Iran have agreed to a two-week ceasefire, oil has pulled back sharply, with Brent crude oil dropping as low as $91 per barrel at one point. As I write, it’s at $97.
This pullback has negative implications for BP. That’s why the share price has dipped.
The issue with oil stocks
This share price volatility highlights a major issue with oil stocks and that is that they’re unpredictable. Ultimately, they’re a little speculative because their fortunes are tied to oil prices, which can be extremely volatile.
When oil prices are rising, it’s usually great for the shares. However, if oil experiences a sudden drop, the shares are likely to suffer.
What’s next for BP?
As for where BP shares go from here, that’s hard to predict. A lot will come down to the geopolitical situation and more specifically, the situation with the Strait of Hormuz.
If we see a major de-escalation, I’d expect oil prices to fall, putting pressure on the BP share price. But I wouldn’t expect oil to go back to $60 per barrel in a flash – it could stay elevated for months or even years.
Alternatively, if things escalate, oil prices could move higher, boosting the shares. It’s worth noting that the bounce from $91 to $97 suggests that the ceasefire situation is fragile and that the Strait of Hormuz situation is complicated.
So, for investors, there’s definitely an element of speculation here. One really needs to take a view on what will happen to oil in both the short term and the long term (don’t forget decarbonisation risks).
Any value left?
Zooming in on financial metrics, BP shares currently trade on a forward-looking price-to-earnings (P/E) ratio of about 12.5, using the consensus earnings forecast for this year. However, this forecast could be way off the mark given recent fluctuations in oil prices so I don’t think this metric is very useful right now.
Perhaps a more useful indicator of value for investors is the dividend yield. This stands at about 4.5%, which is decent, but not high (and not as attractive as it has been in recent years).
Given the yield, the shares could still be worth considering. One way to look at this stock could be as a hedge against geopolitical instability.
Taking a long-term view, however, I think there are better opportunities to consider in the market. Personally, I’m focusing on other high-quality stocks that have fallen in the recent sell-off.
