It’s been a rocky road for the BP (LSE: BP) share price so far in 2019. It was pulled higher by the threat of US-Iranian military action and subsequent fears of disruption to Middle Eastern oil supply, and more recently signs that North American shale drillers are pulling back on production. But it was yanked back to terra firma amid rising US crude inventories and some frightful key economic indicators from across the globe.
These conflicting pulleys mean that BP’s stock price has gained just 1% since the turn of January, though it’s not a surprise to see some dip buying emerge in recent days. As well as boasting a ‘cheap’ forward P/E ratio of 12 times — a little distance below the FTSE 100 average of 14.5 times — the oil leviathan also carries a corresponding dividend yield of 6.6%, bashing the UK blue-chip average by around two whole percentage points.
Despite these compelling valuations, though, I’m still not tempted to take the plunge with BP today, a stock which recently closed at its cheapest for 18 months around 485p. Brent prices have lost more than 10 bucks in a little over three weeks, to current levels around $58 per barrel, on account of a string of patchy data from critical regions.
And so bad has been the deterioration in many of these datasets that it’s likely energy values will only keep on tumbling. Recently grabbing the headlines were manufacturing PMI data from the States which, at 47.8 for September, plunged further into contraction and is at its lowest since mid-2009. ADP jobs data has also shown fewer roles created than were hoped for, and by quite a distance too, adding fuel to claims that US-Chinese bickering is hammering trade.
Speaking of which, official manufacturing PMI from China contracted for the fifth straight month in September and came in the wake of industrial production growth data which was at 17-year lows. And elsewhere, another fall in factory orders in Germany last month heightens speculation that Europe’s biggest economy is about to slump into recession.
Oversupply set to last?
Adding another weight to the crude price in recent sessions has been an uptick in US crude inventories. Latest government data showed supplies grew for a third consecutive week, up by a blockbuster 3.1m barrels in the week to September 27. And the pace of increases is accelerating too.
As I said at the top of the piece, US shale producers have been unplugging their rigs from the ground with gusto more recently. Latest Baker Hughes data shows the number of operating units falling for seven weeks on the spin.
However, signs of mounting stockpiles suggest that these cuts are failing to keep up with the rate at which demand is falling. And it’s quite possible that this disparity between consumption and production will last into 2020 too, and quite probably beyond as other major producing nations like Canada and Brazil ramp up investment in their domestic energy sectors.
The risks to BP’s earnings are quite colossal, then, in the near term and beyond and I expect its share price to keep on slumping. There’s no shortage of big income payers to buy today and for this reason I’m quite happy to leave the oil giant on the shelf.
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Royston Wild has no position in any of the shares mentioned. 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.