The Motley Fool

As oil prices increase should investors buy into the BP share price?

Global oil markets got the jitters over the past few days due to coordinated attacks on critical Saudi Arabian oil infrastructure. As a result, production capacity in these oil-fields are down by 50%, which represents about 5% of the world’s oil supply.

On Friday, 13 September, the international benchmark Brent crude closed at about $60. On 16 September, the day after the attacks, the price went over $69.

Increasing oil prices and FTSE shares

Unsurprisingly, the news also sent oil and energy stocks flying on Monday, both globally and in the FTSE 100. Oil giants BP (LSE: BP) and Royal Dutch Shell were the standout winners, rising 4% and 2.6% respectively.

It may take several days or even weeks for the markets to figure out the extent of the damage of these attacks which may potentially lead to further volatility in the price of oil. There might even be a risk of political or military escalation.

Therefore, I see value in holding an oil company in a long-term portfolio. My choice for both capital gains and passive dividend income would be BP.

BP has an enticing dividend yield of around 6.6% with a trailing price-to-earnings (P/E) ratio of 11.9. On 30 July, the group released second-quarter and half-year results that showed robust financial performance as well as impressive operating cash flows.

Its upstream and downstream divisions performed strongly as production increased 4% to average 3.8m barrels of oil equivalent per day.

Management has also been diversifying the portfolio and increasing the group’s alternative energy products, including renewable fuels and power. 

Not every company is a winner when oil price surges

If you held shares in British Airways-owner International Consolidated Airlines Group, a company where the largest variable expenses are fuel costs, you would have noticed that the shares ended Monday down 2.1%. 

Also going the other way was the share price of the cruise operator Carnival, which traded lower on the back of higher oil prices.

Rising oil prices may also impact the price of other shares like consumer cyclical stocks. Going into the last quarter of the year, if higher oil price were to become permanent, the average consumer would have reduced disposable income available for non-essential goods and services such as entertainment, luxury goods, or non-essential travel.

A Fool’s view

Understandably, for the average investor, it is next to impossible to keep abreast of such daily developments in geopolitical or financial markets. And that is where the importance of diversification comes in.

To put it simply, diversification is all about reducing risk. Diversification will not eliminate all the risk in your equity portfolio. But your long-term risk/return ratio is likely to be more attractive.

If you are new to investing or do not have the time to select companies that enable you to diversify fully, then exchange-traded funds (ETFs) or tracker funds could be the way forward. Both are passive investments that track a particular index without attempting to outperform it.

One example of an ETF would be the FTSE All-World ETF, tracking the performance of a large number of stocks around the globe.

If you’d like to have domestic exposure only, you could instead buy into a FTSE 100 tracker fund.

For those who continue to invest in a diversified range of shares for the long-term, the recent oil-field attacks will likely be just another headline.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, “10 Steps To Making A Million In The Market”.

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide.

Simply click here for your free copy.

tezcang has BP covered calls (September 20 expiry) on BP ADR shares listed on NYSE. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.