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Why I think the OPEC cuts may not be enough to save the BP share price

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The BP (LSE: BP) share price has dropped 34% since the beginning of the year. The oil market crash of 2020 has driven the share price down to a five-year low. The OPEC cuts are unlikely to help.

BP is in good company. FTSE 100 oil major, Royal Dutch Shell is also hurting. Its shares are down 38% from its 2020 high. Meanwhile, stocks of smaller peers Tullow Oil and Premier Oil have plummeted 63% and 75% respectively.

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The oil price crash was initially caused by the coronavirus-induced slow down in demand for oil. But this happened at the same time as its oversupply. And with OPEC+ refusing to cut production, share prices in oil companies tanked further.

However, OPEC+ signed a US-backed deal on Sunday. The aim is to cut almost 10% of the global oil supply. The hope is this will be enough to raise oil prices, and with them, the shares of oil companies.

However, I am skeptical.

BP share price is helped by its diversity

BP is an integrated oil company. This means it operates in every aspect of the oil and gas business from oil exploration and production (E&P) to refining to trading. It also has a renewable energy division. Therefore, its share price represents the diversity of its operations. 

The oil majors can offset the now lower-margin E&P assets with cheaper oil feedstock into their refining businesses. They are also big oil traders, able to use the market to add value to their positions. Smaller peers based only in E&P are far more exposed to oil market volatility.

This higher exposure is mirrored in the size of their respective share price crashes. Indeed, the market appears to have already accounted for business model differences between oil firms.

OPEC cuts production by 9.7m barrels

Sunday’s deal means that OPEC is going to cut oil production up to 9.7m barrels per day. However, this reduction is from an already raised production level. Some traders doubt this will be enough to boost prices in the short term due to the oil glut.

With no end to the coronavirus pandemic in sight, oil demand is not likely to increase anytime soon. The main buyers of oil are likely to be G20 governments filling up strategic reserves with cheaper oil.

Besides, OPEC countries are likely to cut production of their heaviest crudes first. This is because they already sell for less than lighter grades. Refineries and markets in residuals fuels could see an increase in prices. This may help to steady BP’s share price slightly. But, it won’t likely have a huge effect on the rest of its businesses. 

With market-driven supply already down in the US, it could be that OPEC+ countries try to use this time to increase their market share. This means more cuts may be unlikely anytime soon. And some analysts already believe Sunday’s cuts are too little too late.

Once strategic storage reserves have been maxed out, the market will have to rebalance. And that will mean low oil –and share – prices for the future.  

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Rachael FitzGerald-Finch holds shares in BP and Royal Dutch Shell. 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.

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