For most firms offering a product or service, there is a large reliance on a certain element. Usually this is determined by the largest component within the cost, be it human capital or raw materials. For BP (LSE: BP), the largest impact to the service it provides is the oil price. Thus the share price for BP has a good correlation with the oil price, which is what you would expect.
Isn’t the oil price falling?
Yes, it is. The oil price (both Brent and WTI) has been falling over the past month, with the WTI May contract actually trading below $0 a barrel. The main reason for this slump is the sheer amount of oil in the market right now. Countries like Russia and Saudi Arabia are pumping huge volumes out, but there is not that much demand for it. Airlines have fleets grounded, and consumers like you and me are barely driving our cars. So naturally the price of oil is falling
What does this mean for the BP share price?
Normally this would not be good for BP. The firm is involved at all stages of the process. It explores and produces around 3.7m barrels of oil per day. From t here it refines and sells it on, with over 18,700 service stations serving the retail sector of the business. Even though the firm does have operations in natural gas and other products, oil is the money maker.
Yet the share price for BP is not falling that much considering the huge fall in oil price. This makes me have a positive outlook on the stock.
Firstly, it shows that other investors are not concerned about the soundness of the firm at the moment. The firm has announced a strategy of £2bn worth of cost cutting by the end of next year to counteract low oil prices. This move will strengthen an already strong balance sheet, with cash balances as of 31 December 2019 standing at over £17bn.
Secondly, the oil price is not forecast to drop much further. Various reasons support this, with the primary one being demand driven. Global demand is expected to rise over the next two months as economies come back online and some degree of normality resumes. Further, the supply is expected to be reduced from key producing nations.
Thirdly, the share price will likely be supported by income investors looking for dividends. As we stand, BP has not cut the dividend, and this gives the firm a dividend yield of over 10%! Even if you disagree with my above reasons, this is a strong enough reason itself to consider buying the share.
My Foolish takeaway
The BP share price does have a correlation to the oil price, but this has decreased recently. The sentiment from this is that the share could be a strong long-term buy, which can survive despite a low oil price now. By picking up income when the price is low, and hopefully benefiting when the oil price rallies, investors could enjoy long-term benefits from buying now.
Jonathan Smith and The Motley Fool UK have 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.