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BP (LSE:BP) shares are up almost 100% over the last five years. But I’m on the lookout for what I think could be a potentially huge opportunity.
Oil prices are at some of their lowest levels since the Covid-19 pandemic. And while the short term looks uncertain, there are reasons to be positive about the FTSE 100 company going forward.
Oil prices
BP’s stock has been closely correlated with the price of Brent crude over the last 10 years. That’s no big surprise – higher oil prices should make shares in companies that sell oil more valuable.
Source: Trading Economics
It’s worth noting though, that Brent’s trading towards the lower end of where it’s been over the last five years. Since the end of the Covid-19 pandemic, oil prices have generally been higher.
There are a few reasons for this. Higher supply from Saudi Arabia and increased production in Brazil and Guyana have met with moderate demand due to uncertainty over international trade.
Historically, situations like this have been the best times to consider buying oil stocks – including BP. But investors need to think about what’s coming in the next year – and beyond.
Outlook
In the short term, the outlook for oil prices is quite murky. There’s a lot of uncertainty about which direction the current supply and demand equation is set to move in next. For example, both the US and China have been adding to their strategic reserves. But this can only prop up demand for so long and if it stops, prices could fall further.
On the other hand, it’s clearly not in the interests of Saudi Arabia to keep production levels high if prices are falling. So the supply side could come back into line with where it was before.
Furthermore, changes in the political situations in Gaza and Ukraine could also move prices in either direction. Predicting near-term oil prices is exceptionally hard, but it might not be necessary.
Long-term
The big advantage long-term investors have is that they don’t have to worry about exogenous shocks that cause short-term moves in oil prices. What matters is where prices go over time.
That’s why I think the current situation’s a very interesting one. There’s a lot working against oil companies at the moment, but there’s also an enormous trend in their favour on the demand side.
Building out artificial intelligence (AI) infrastructure has accounted for almost 100% of GDP growth in the US this year. And it’s not showing signs of stopping any time soon.
Whether they use renewables or hydrocarbons, AI data centres consume a lot of power. And that gives investors a big reason for long-term positivity around energy demand.
Is BP the right stock?
I think this is a good time to be looking at out-of-favour energy stocks – I’m convinced oil prices are likely to be higher over the long term. The question though, is whether BP is the right choice.
Mindful of windfall taxes and the UK’s approach to drilling in the North Sea, I’ve been adding to my investment in a US oil company. But history says it’s time to at least take a look at the FTSE 100 stock.
