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Why I’d invest £1,000 in the BP share price today

The oil price has picked up in the past couple of weeks, though not by much. Brent Crude now fetches just $30 per barrel, which is at least better than April’s $20 levels. But it seems of little comfort to BP (LSE: BP) shareholders. The BP share price has crashed 33% since the beginning of 2020, a good bit worse than the FTSE 100‘s 20% fall.

Does that mean we should be forgetting the big losers like the BP share price? Should we be buying those with gentler falls? Or stocks that have actually risen? Buying more defensive stocks can be a good move. But I think it would be a mistake to dismiss big fallers like BP.

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Governments are loosening Covid-19 lockdowns gradually in a number of countries. But oil demand is surely not going to rise significantly until we see a large-scale return to work and the restart of major industries. And until the travel industry, which is a big consumer of fuel, gets off the ground again.

When is all that likely to happen? It’s way too early to tell. But I think we can pretty much write off the rest of the year as far as oil demand goes. That’s unless OPEC can get its act together and restrict production further, and get the world supply glut down a bit. But I’d expect even that to only have a relatively small effect, and I don’t see a big BP share price boost any time soon.

Dividend at risk

And while I’m being pessimistic, I see a possible reason to steer clear of the BP share price for a while longer. That’s the dividend. Analysts’ forecasts now suggest a 10% dividend yield this year, and it would dwarf whatever earnings the company is likely to report.

When the previous oil price crash was with us, we had Bob Dudley at the helm of BP. He warned us that the price crunch was likely to last a number of years. That was more pessimistic than many observers, including me, expected, but he was right. Despite that, he also assured us that BP was not going to cut its dividend, and it didn’t. Without providing the same assurance, Royal Dutch Shell also kept its dividend going throughout the crisis.

This time, we have no Bob Dudley, and no such assurance. And Shell has already cut its dividend, which led to a sharp drop in its share price. Shell shares have slumped further than the BP share price, losing a whopping 43% so far this year.

BP share price

I see a good chance the BP dividend will be cut. But if that happens, I reckon any resulting share price fall could provide us with one of the best share buying opportunities of the year. I do see the BP share price as too cheap now, based on the long-term recovery in oil and share prices that I think is inevitable.

But added to that, a dividend cut could plunge the markets into further pessimism. And that could be the perfect time to buy. Be “greedy when others are fearful,” Warren Buffett has famously urged us. I think it could soon be time to do exactly that.

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Alan Oscroft 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.