Say what you want about big oil firms: at the end of the day, they represent an indispensable part of our everyday lives. Until the time that renewable energy sources take over, oil is essentially what powers our high-tech societies. However, that concept alone hasn’t done much for BP (NYSE:BP) or the BP stock price.
As our own Dana Blankenhorn explained earlier this year, the company was at the center of the Deepwater Horizon explosion. Aside from sparking yet another Mark Wahlberg movie, the oil-rig explosion caused severe damage to the Gulf of Mexico. And after nearly a decade removed from the incident, Deepwater Horizon still levers an unfortunate impact on the ecosystem.
For environmentalists and those concerned about big corrupt corporations, it’s quite fitting that the BP stock price never recovered from the incident. It got close in 2014, but for the most part, shares have traded well inside a bearish trend channel.
But even more startling, BP essentially hasn’t moved on an adjusted basis since 1997. To put that into perspective, some of our readers weren’t even born at that time.
This is Wall Street’s version of the money pit: BP does just enough to keep you interested. However, it never reaches its true potential.
And Blankenhorn makes a strong case that you shouldn’t hold your breath. The company is deeply in debt, oil supplies are booming everywhere, and renewables are making substantial progress. As a trade, the stock might be worth a shot. However, its days as a long-term investment are gone.
BP Stock is a 50/50 Proposition
Undeniably, the British multinational oil firm is one of the most frustrating names within the energy sector. Companies like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) have at least made progress since the 1990s.
As I stated earlier, the BP stock price is largely flat over the same period.
One of the reasons is that the stock price and oil prices don’t have the strongest correlation. Let’s face it: surging gasoline prices starting from the early 2000s coincided with the run-up in big oil.
Unfortunately, BP really didn’t benefit from oil demand. Between June 1999 and June 2019, the correlation coefficient between oil prices and the stock price was only 54%. That’s not the greatest strength in terms of a direct relationship between the two metrics.
However, from January 2017 onward, the correlation coefficient is 86%. In other words, as oil prices rise, so too does the BP stock price. Additionally, I would argue that finally, BP is becoming a rational or logical investment by tracking the underlying oil market.
In terms of trading, I think this is good news. If you can forecast oil prices, you’ll statistically have a better chance at actualizing profits from BP.
But predicting the oil market is an especially tricky affair right now. Blankenhorn referenced reports that oil demand from automobiles will peak in the mid-2020s. If I’m reading the long-term chart for Brent Crude objectively, I admit this is a big concern.
Oil prices peaked in the summer of 2008, and it has never reached that lofty point since then. Moreover, “black gold” appears to be charting a series of lower highs.
BP Stock Has a Small Chance of Success
If oil declines or goes rangebound, I’m not sure if I trust BP. After all, the data suggests that the BP stock price is dependent upon a robust underlying market. Anything less than that may cripple shares because the company has a credibility problem.
That said, I think oil prices may tick up. Due to a strong labor market, for example, more people are traveling. Yes, historically lower fuel prices may contribute to that, but robust labor plays a far larger role. Eventually, if this trend continues, oil prices will rise due to normal supply-demand dynamics.
Finally, I think the renewable energy case as it relates to autos is overstated. While electric vehicles have captured consumer attention, they require an overhaul of our energy infrastructure. Even if that occurs, what happens if millions of drivers plug in their EVs during a record-breaking heatwave?
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.