Will The Oil Price Dip Send BP plc and Royal Dutch Shell Plc Back Into Reverse?

Oil is up 44% since Brent crude hit a low of $27 a barrel in January, to reach $38.93 at time of writing. FTSE 100-listed oil giant Royal Dutch Shell (LSE: RDSB) has rallied with it, its share price up 33% since mid-January, from a low of 1277p to today’s 1709p. BP (LSE: BP) is a more troubled beast and its share price growth has been less spectacular, rising just 5.5% from its January low of 328p to 346p today.

All tomorrow’s parties

The oil recovery has stumbled, with the price recently hitting a one-month low as hedge funds cut their net long position. So is the party over before it started swinging?

Latest oil futures suggest there could be more to come, rising on a flash of bullishness from US Federal Reserve chair Janet Yellen and positive German domestic growth data. Hopes are also rising that OPEC and non-OPEC members will agree to cap output in Doha on 17 April, but I suspect those hopes will be dashed.

Iran aims to pump 4m barrels a day next March for the first time since 2008. It’s keen to resume its mantle as OPEC’s second biggest exporter, overtaking Iraq, and won’t freeze output until it hits its goal. Saudi Arabia won’t freeze if Iran won’t. Russia has hinted that it might accept a freeze, but nobody trusts it to stick to any deal. All the other oil producers need the money too much to risk losing market share. Right now, they’re merely talking the price higher.

Summer lovin’

Oil could nonetheless rise. I could see it hitting $50 over the summer, although I can’t imagine it climbing higher without OPEC help. Shale is unlikely to trash the party yet: Goldman Sachs reckons oil needs to hit at least $70 to give US investors a second wind. Global oil supply seems likely to remain high, with Russia pumping at a 30-year high and the US producing 10m barrels a day, second only to Saudi. But the price fell too low and must revert at some point. Demand is rising and could swallow excess production. The current pause may just be a staging post in the recovery.

If I’m right, now could be a good time to buy into BP and Shell. You’ll never find the perfect time (you missed it with Shell in January, bad luck) but this looks like a good time to build a long-term position. Oil will surely be higher in one year’s time. BP needs the price to hit $60 to secure its dividend, which may explain why its recovery is so less impressive than Shell’s.

Of the two, Shell has been my preferred option for several years. It has a prouder dividend history than BP and management will fight tooth and nail to defend today’s payout, which yields a fabulous 7.28%. Trading at 7.8 times earnings, Shell’s price reflects some of the risk. You have to accept that both dividends are a risk. But if they’re cut, and the share price falls further, that could be your next opportunity to buy more stock.

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