The Risks Of Investing In BP plc

bpToday I am highlighting what you need to know before investing in BP (LSE: BP) (NYSE: BP.US).

Persisting oversupply threatens price growth

Oil prices experienced somewhat of a renaissance in June, prompted by the relentless march of ISIS (or Islamic State of Iraq and Syria) forces across the oil-rich regions of Syria and into Iraq.

The situation drove Brent crude to its highest for nine months, above $115 per barrel, although prices have since staged a sharp decline as concerns over future supply have receded — the benchmark was recently changing hands around the $105 marker.

Indeed, the prospect of waves of oversupply hitting the market threatens to derail the oil price in the long term. The Organisation of the Petroleum Exporting Countries (OPEC) commented just this month that it expects surging shale gas supply from the US to keep total global supply outpacing demand over the next couple of years at least.

Flows from non-OPEC nations is expected to rise by 1.47 million barrels of oil per day (mbod) in 2014, to 55.65 mbod, mainly due to production levels in OECD nations in the Americas hitting record levels. A further chunky rise, to 56.96 mbod, is expected in 2015.

With the group adding that “even if next year’s world economic growth turns out to be better than expected and crude oil demand outperforms expectations, OPEC will have sufficient supply to provide to the market”, supplies should be plentiful enough to constrain oil prices even if troubles in Iraq and Libya persist, a worrying omen for BP’s earnings prospects.

Courtroom chaos threatens earnings profile

Of course, BP also faces huge uncertainty over what it will be forced to pay out in total compensation as a result of the 2010 Deepwater Horizon oil spill.

On top of the masses of businesses and individuals who have already filed claims against the fossil fuel giant, legal firm Pomerantz Law earlier this month rounded up 32 of the firm’s major British shareholders — including several London boroughs as well as the pension fund of Royal Dutch Shell — who wish to seek restitution following the dramatic fall in BP’s share price after the disaster.

Indeed, plaintiffs are queuing around the corner to make their case against the firm, with claims ranging from loss of business income through to operational negligence, and the company paid its maiden compensation for medical-related claims at the start of the month. With new claimants emerging all the time, BP’s time in the dock looks set to stretch well into the future, a scenario which is likely to drag heavily on earnings.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.