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Why I Wouldn’t Touch BP plc With A Bargepole

Shares in fossil fuel colossus BP (LSE: BP) (NYSE: BP.US) have enjoyed a solid run skywards in recent months. Since the turn of the year the stock has stepped 15% higher, hitting heights not seen since last September above 470p per share, supported by a solid improvement in the crude price.

The Brent benchmark was recently trading around $57 per barrel, a decent recovery from the multi-year lows punched around $47 in early January. Still, with this upward momentum having stalled during the past several weeks, fears have arisen that crude’s recent improvement could prove nothing more than a ‘deadcat bounce’, a terrifying prospect for BP and its peers.

Supply continues to spurt higher

And these concerns are being fed by the relentless stream of worrying news from the oil market. Latest data from the US Energy Information Administration (EIA) showed domestic inventories leap by almost 11 million barrels last week, the biggest on-week gain since 2001, and driving total supplies to a frightening 482.4 million barrels.

Although the US continues to reduce the number of rigs in operation, total production keeps on rising as flows from its most profitable fields pick up — indeed, the EIA also reported that total output last week remained around multi-decade peaks of 9.4 million barrels.

On top of this, pumping activity in Saudi Arabia — a nation responsible for more than a tenth of global output — reached record highs of 10.3 million barrels per day in March. And fears concerning Middle East supply have also risen as talks between Iran and the West over the country’s nuclear programme appear to be progressing, a situation which could release even more of the black stuff onto the market.

Bafflingly-poor value for money

Against this terrifying backcloth BP continues to batten down the hatches, and announced last month plans to cut another 200 roles from its North Sea workforce in a bid to reduce costs. The company had already slashed its capex targets for this year, from $24bn-$26bn previously to $20bn, further illustrating the huge pressures facing the industry.

So given that revenues are in danger of further heavy weakness looking ahead, quite why the City expects BP to record earnings growth of 64% in 2015 and 51% in 2016 is beyond me, I’m afraid,. But even if such bullish figures were to materialise, they still leave the business dealing on an elevated P/E multiple of 19 times prospective earnings for this year, although this falls to a more palatable 13 times for 2016.

Still, I would expect a reading below the value benchmark of 10 times to be a fairer reflection of the downward risks facing BP and the wider oil sector. In my opinion investor sentiment towards the oil giant has reached giddy levels, a situation which leaves the firm in danger of a severe share price correction.

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Royston Wild 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.