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Consider Buying BP plc And Royal Dutch Shell plc Before The Oil Price Rises Again

So the oil price has sunk even lower, to just $97 a barrel. Clearly, geopolitics isn’t driving the oil price. If it was, tensions in the Middle East and Ukraine would have sent it flying towards $200 a barrel.

Other factors are more important. Supply is rising, partly due to US shale. Revived Libyan production is heading for 900,000 barrels a day. At the same time, demand is slack. Chinese industrial output has just disappointed, up just 6.9% in August, against expectations of 8.8%. The eurozone is barely growing at all.

bpCheap oil is, of course, great news for economic growth. As a motorist, it’s good news for me. But it isn’t such good news for BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US).

Both oil majors have seen their share prices drift lately, despite posting strong profits. BP is down 7% in the last three months, although that is largely due to brazen attempts by the US courts to cash in on the Deepwater Horizon blowout. Never waste a crisis, as the Americans say.

BP is also caught in the full glare of the Ukraine crisis, thanks to its 20% stake in Kremlin-controlled Rosneft.

Shell has done better, yet its share price is flat over three months. That’s disappointing, given that it has just smashed Q2 profit expectations, up 32% year-on-year to $6.1bn.

Rouble In Store

The oil price isn’t everything to these vertically integrated oil majors, but it has an impact. Yet I would caution against the assumption that oil will carry on falling.

In an interview with the Financial Times, former BP chief executive Tony Hayward, now chairman of FTSE 100-listed commodity giant Glencore, has warned that US and European sanctions against Moscow could hit oil supply and push up prices.

The restrictions, which include cutting off Russian access to capital markets and depriving the country of Western oil technology, leaves the global economy exposed to possible volatility in the flow of oil.

Hayward also warned that the shale boom, which has boosted crude output by 60% in six years, has lulled us into a false sense of security. When US supply peaks, we could be in for a shock.

Arabian Gulf

I have expected Saudi Arabia, the world’s largest crude oil exporter, to make a move to defend $100 a barrel oil for some time, and now it appears to have done so, cutting production by 408,000 barrels a day in August. That is the largest monthly drop since 2012, Bloomberg says.

Of course, even the Saudis can’t sustain the oil price on their own. Libya, Nigeria, Kuwait, Ecuador, Iran, Iraq and the United Arab Emirates all increased oil production in August.

And some have even suggested that Saudi would be happy to see the oil price fall as low as $85, to give the Western Europe a boost in the fight against ISIS.

On the other hand, OPEC sees the current drop in the oil price as a seasonal dip, and predicts prices will rise in winter.

royal dutch shellWinter Wonderland

So clearly, there’s a lot of uncertainty out there. Which partly explains why you can buy BP at a forecast price/earnings ratio of 9.7 times earnings for December, with a forecast yield of 5.1%. And Shell on a forecast 10.7 times earnings for December, and a 4.6% yield.

Both forward valuations look tempting.

Of course, oil could fall further. Today’s low share prices reflect that. But as Tony Hayward has pointed out, we are just one shock away from seeing a reversal.

BP and Shell are good value today. Today’s prices could look even better value when winter comes.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.