The positive news from Pfizer this week has many running to buy shares that were suffering before. Generally I think these moves are too much too soon. It does have me wondering though, if the 25% jump in the BP (LSE: BP) share price this week is sustainable.
Covid-19 as a crude oil catalyst
The BP share price, as with almost all oil firms, is closely related to the price of crude oil (and natural gas) itself. Crude oil has been seeing a bad year. Lockdowns and restricted travel has been weighing heavily on hydrocarbon demand.
But oil was already suffering before Covid-19 hit. The crude market currently has a large oversupply. More specifically, there is a large amount of spare capacity. Earlier this year, the American crude benchmark, West Texas Intermediate (WTI), grabbed headlines by dropping into negative territory. The European benchmark Brent hit lows of $20 a barrel.
This caused two major reactions in the oil industry that have helped bring prices back up. Firstly, producers turned off the switch. Lack of demand simply means they reduced production and refinery throughput. Secondly, OPEC and Russia have both also tightened their supply. Currently, the two are keeping an estimated 8m barrels a day offline.
Personally I am of the opinion that the Covid-19 outbreak acted more as a catalyst for a quick drop in crude prices than a long-term fundamental problem. The market was waiting for something to tip it over the edge, and Covid-19 did so. The BP share price followed suit.
My biggest concern at the moment is recession. If a global recession comes about, oil and share prices both will suffer. Personally I think this will delay, though probably not cancel out, my positive outlook.
But if we can avoid a recession, however, the fear that drove oil lower should recede. Crude will still face a large spare capacity, but as always producers will regulate this production for their own interest. Higher oil prices should lead to a higher share price.
The price of oil may not rocket to $100/bbl again, but BP doesn’t need it to. Already, with Brent at $40, the company has been able to return to profit in Q3. In 2021, Brent is expected to climb back to an average of $50/bbl.
Will this help the BP share price?
With all this talk of the oil markets, it’s fair to ask if this will really help the BP share price. Personally I think yes. I am bullish on BP, which is why I recently increased my position in the company.
I originally had BP in large part as a dividend stock. When the company reduced this I was not happy. However with the share price at recent lows, even the current dividend translates to a yield of about 8%. A more buoyant crude market should see its payout go back at some point.
BP is also investing heavily in green and renewable energy sources. For me this sets it up for the long-term. Public sentiment is moving away from crude oil, and so too must oil companies. As I said, I have been bullish on BP for a while. Nothing that has happened this year had changed my mind.
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Karl has shares in BP. 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 2020