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The BP (LSE: BP) share price has had a rough ride but lately it’s been showing signs of life. It’s up 7% in the last month, although that still leaves it down 13.9% over one year.
I’m pleased by its modest progress, because I bought BP shares on 18 September for 411p and averaged down at 392p on 22 November. I’m still underwater at today’s (15 December) price of 395.75p but only by around 3%.
This oil giant is starting to recover
I don’t have any spare cash to invest, but if I did, BP would be high on my shopping list. Yet I still think BP could be in for a tough 2025.
Anybody who fell for the hype around ‘peak oil’ – the suggestion that at some point we’d run out of accessible oil – has learned to be wary about forecasting energy price movements. The shale revolution killed that theory.
Lately, all the talk has been about ‘peak demand’, as renewables give oil and gas a run for their money.
On 3 December, the Bank of America forecast that oil will average around $65 per barrel in 2025, amid an oversupply of crude and slowing demand as countries shift toward cleaner energy and transportation.
Yet on 12 December, the International Energy Agency hiked its 2025 global oil demand growth forecast from November’s 990,000 barrels per day to 1.1m, citing “the impact of China’s recent stimulus measures”.
Markets are forecasting all sorts of things about US President-elect Donald Trump’s impact on the oil price, but I’ll stop there. That way madness lies. Nobody can second-guess stock market movements, just as nobody can second-guess the oil price.
This is a cyclical stock and events will turn
So I’ll go back to first principles, and here they are. First, commodity stocks are famously cyclical Trading at a remarkably low price-to-earnings ratio of 5.73. BP appears much closer to the bottom of the cycle than the top. At that valuation, the shares look too cheap for me to ignore if I had the cash.
Second, the way to combat short-term price volatility is to buy shares with a long-term view. I don’t know whether my BP shares will smash it in 2025, 2026 or whenever. Yet I believe over the long run that the world still needs oil and if it doesn’t, BP will adapt to the energy transition.
Third and finally, a high yield helps compensate for short-term instability. As BP shares flounder, the yield has climbed up to 5.76%. That’s comfortably above than the FTSE 100 average of 3.58%. I’ll reinvest every penny while I wait for my BP shares to lift off.
I may still be wrong. The race to renewables could destroy oil demand faster than we think. Oil company stocks are always just one way accident away from meltdown. The fatal explosion on the BP’s Deepwater Horizon drilling platform in the Gulf of Mexico in 2010 hammered BP’s shares for a decade.
It may be risky but the potential rewards are high. I would buy more at today’s price but sadly, I don’t have the money right now.
