BP Jumps On Oil's Jolt, Can It Last?

BP Jumps On Oil's Jolt, Can It Last?

City Index  | Sep 16, 2019 12:03

BP (LON:BP) has popped over 4% higher in early trade on Monday.

What’s behind the price increase?

Oil prices soared over 20% to over $70 per barrel, the biggest percentage spike in over three decades, following an attack on Saudi Arabia’s oil infrastructure over the weekend. Whilst the price of oil has eased back to $65.50, higher oil prices are beneficial for oil majors, increasing their profit margins.

Will oil price remain elevated?

Geopolitical risk in the Middle East is nothing new. However, what we are seeing is a physical disruption to supply, as the attacks over the weekend cut half the county’s oil production. This equates to a disruption on as much as 5% of global oil production.

We can expect oil prices to remain elevated whilst production is disrupted. As production returns, we can expect the price of oil to start declining back towards $61.50. That said, not all the gains will be pared, as the price will need to represent the increased geopolitical risk premium. However, today’s jump in the oil price is more of a reflection of the impact on supply rather than a significantly higher risk premium.

Let’s not also forget that the demand picture isn’t great right now which will dampen the oil price quickly. Most recently China’s industrial production figures disappointed overnight. Last week, OPEC lowered global growth expectations to just 3% for 2019. Furthermore, this is a bearish time of year for oil, as the driving season comes to an end. These factors should also help bring the price of oil lower.

More upside for BP (LON:BP)?

BP PLC Chart

Prior to today’s rally the FTSE was trading just 2% higher YTD, under-performing the broader FTSE index. Today’s rally in BP (LON:BP) is a knee jerk reaction to the spike in oil. Looking at the chart we can see how closely BP’s tracks movements in oil.

As the oil supply returns to previous levels, BP (LON:BP) could pate some of today’s gains. However, there could be other reasons to consider BP longer term:

  • BP (LON:BP) recently sold its entire Alaska oil operation for $4.5 billion. It plans to sell off a further $10 billion of current assets across the next 2 years so plenty of cash will be coming in. This also means that BP can take advantage of other opportunities “more closely aligned with its long-term strategy”, as noted by chief executive Bob Dudley.
  • BP (LON:BP) is transitioning away from an oil led business, shifting its focus to the booming renewables market. Whilst we all know that elephants don’t gallop BP is changing slowly but surely. BP expects renewables to account a growing proportion of the global energy markets.
  • BP (LON:BP) pays solid dividends, which are expected to increase in Q3 or Q4.
  • Reporting in dollars means that BP (LON:BP) is less susceptible to volatility in the pound – a definite positive amid Brexit uncertainty.
  • Points of concern:

  • The big thing to watch with BP (LON:BP), aside from the price of oil is its debt levels. Net debt increased in H1 2019 results to $46.5 million, as did net gearing to 31%. Whilst these levels are not unusual for this sector they are worth keeping tabs on.
  • "Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

    Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions."

    Original Post

    City Index

    Related Articles

    Latest comments

    Add a Comment
    Please wait a minute before you try to comment again.
    Write a reply...
    Please wait a minute before you try to comment again.

    Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
    Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
    Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
    It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
    Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

    English (USA) English (India) English (Canada) English (Australia) English (South Africa) English (Philippines) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
    Sign out
    Are you sure you want to sign out?
    Saving Changes


    Download the Investing.com App

    Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.

    Investing.com is better on the App!

    More content, faster quotes and charts, and a smoother experience is available only on the App.