Where the oil price goes, so goes the BP (LSE: BP) share price. I know the correlation isn’t quite that simple, as we saw after the Deepwater Horizon oil rig disaster in 2010. But it certainly has a massive impact on the fortunes of the FTSE 100 oil giant.
At the end of October, just before the Covid-19 vaccine breakthrough, a barrel of Brent crude traded at $36, while the BP share price had fallen 193p. Both have bounced back since. Brent crude has almost doubled to $67, at time of writing, while the BP share price has jumped 63% to 310p. The correlation isn’t exact, but it can be close.
To a large degree, what happens to the BP share price now rests on what happens to the oil price. Which, of course, depends on what happens to the global economy. Which these days depends on Covid-19.
The BP share price is flying
As well as vaccine success, the recovery has been driven by fiscal and monetary stimulus, trillions of dollars worth, with the US leading the charge.
This red-hot money is looking for a home, and much of it is heading towards energy, metals and minerals, reviving talk of a commodity supercycle. Rising inflation may accelerate this trend, as commodities are a traditional inflation hedge. This could drive the BP share price even higher.
It’s not that simple though. First, we have the Indian Covid variant to worry about. The country is a major energy importer and, as it locks down, demand has fallen. If the mutant variant spreads, this could delay the recovery elsewhere too.
There’s also another longer-term factor threatening the oil price, and therefore the BP share price. It’s called the great renewable energy revolution. Solar power, wind, electric cars… they all pose a threat. Renewable energy growth jumped 45% last year, according to the International Energy Agency, which it labelled the “new normal”.
BP is trying to hop on board, as is FTSE 100 rival Royal Dutch Shell. They face a tricky balancing act, as their profits will rely on legacy fossil fuels for years. Funding the energy transition to renewables will eat up a lot of capital too.
I’d buy this FTSE 100 stock for income
The BP share price got a lift from last month’s better-than-expected Q1 profits, as the oil-price resurgence helped it cut net debt by $5.6bn to $33.3bn. Net profits jumped from $791m to $2.6bn. Meanwhile, management will also resume share buybacks. These are positive numbers, although are reflected in today’s share price.
BP stock doesn’t look expensive to me, despite its sharp recovery, trading at 10.6 times forecast earnings. It also offers an attractive dividend yield of 5.3%, covered 1.9 times by earnings. That’s despite cutting its shareholder payout in half last August.
I still believe BP has a place in my portfolio. I’d buy it today, or stick it on my watchlist and hope for a share price dip. But I’d definitely buy it at some point.
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Harvey Jones 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.
Motley Fool UK 2021