The BP (LSE: BP) share price has plunged in value this year. It’s not difficult to see why investor confidence in the business has taken such a beating. The company is facing the perfect storm of events.
A perfect storm
The coronavirus crisis has hit the global economy like a sledgehammer, and demand for oil and gas has slumped. Initial forecasts suggest that oil demand could fall by as much as 20% or 20m barrels per day this year!
Luckily, oil demand has begun to return as the crisis has started to ease. Forecasters are now projecting a 10% decline in demand for the full year. This upward revision, as well as production cuts, have helped stabilise the oil price. And with the outlook for the black gold improving, the BP share price has recovered from its lows.
However, the global economy is still trying to shake off the effects of the virus. It could be years before activity returns to 2019 levels. As such, it could be some time before oil demand returns to normal levels.
Therefore, the outlook for the BP share price is mixed. The company has acted quickly to try to stem the fallout from the crisis. Management has earmarked 7,000 job losses as well as a reduction in capital spending and unnecessary costs. But the group is also planning to become a “leaner” operation, according to management. This may mean BP is preparing for years of low oil prices and reduced consumption.
BP has also committed to itself to becoming a net-zero emissions company by 2050. Doing so will cost a lot of money.
BP has said its dividend is safe for the time being, but it’s being reviewed every quarter. As its peers cut their payouts, BP may be incentivised to do the same. It seems unlikely the firm will remove the payout another, but a 50% cut shouldn’t be ruled out.
BP share price uncertainty
All in all, with so many headwinds pushing against the business, it looks as if the BP share price faces further turbulence ahead.
Still, the company remains one of the world’s largest energy businesses. This isn’t going to change anytime soon as oil production, refining, and trading is a costly and highly regulated business. There are only a handful of companies that can compete with BP’s size and scale. This gives the business a definite competitive advantage.
Therefore, the BP share price may have the potential to generate attractive returns for investors over the long term as part of a diversified portfolio. The world will always need energy, and as one of the world’s leading energy companies, BP can supply it.
As such, while the short-term outlook for the BP share price might be uncertain, it may be worth snapping up a shares in the business for the long run.
