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Why BP Stock Will Likely Work Over the Next Few Quarters

Easing U.S.-China trade tensions could provide a positive catalyst for BP stock

When it comes to the shares of oil major BP (NYSE:BP), it’s all about the price of oil. As go oil prices, so goes BP stock. That is, when oil prices look poised to rise, it’s time to buy BP stock. But when the outlook of oil prices is bearish, it’s time to sell BP stock.

Source: Shutterstock

It’s that simple.

Fortunately for bulls,  oil prices look well-positioned to rise. Oil supplies are rising steadily. But demand should rise faster, as easing U.S.-China trade tensions should spark an acceleration of the industrial sector, and that part of the economy consumes a great deal of oil.

Thus, oil prices should grind higher over the next few quarters as the global economy picks up steam. As oil prices climb, BP stock price should grind higher, too.

It’s All About Oil

BP stock moves with the price of oil, and the correlation is quite strong.

The attached chart from YCharts overlays the WTI Crude Oil Spot Price (depicted by the orange line) with the BP stock price (depicted by the blue line) over the past three years. The two lines look identical. 
Click to Enlarge

When oil prices surged from mid-2017 to mid-2018, BP stock surged higher, too. When oil prices collapsed in late 2018, so did BP stock price. As oil prices rebounded in early 2019, BP PLC stock rebounded, too. Then, as the oil rebound faded over the past few months, the BP rally of early 2019 faded, too.

In other words, BP stock price moves in tandem with oil prices.

This makes sense. BP is a major oil company. It makes most of its money from selling oil. Thus, when oil prices go up, it generates more revenue and more profits.

Conversely, when oil prices drop, it generates less revenue and lower profits. Profits ultimately determine the direction of a stock. In BP’s case, oil prices determine the direction of profits, so oil prices determine the direction of BP stock price.

When it comes to BP stock, follow oil. If oil is going to go up, buy BP stock. If oil is not going to rise, sell BP stock.

Oil Prices Will Grind Higher

At this point, oil prices look poised to grind higher for the foreseeable future.

A big chunk of the demand for oil comes from the global industrial economy. But the U.S.-China trade war has created global geopolitical and trade uncertainty.  That uncertainty has weighed on the production and output of the industrial economy, since that part of the economy is heavily dependent on trade.

Just look at these manufacturing Purchasing Manager Indexes from across the globe. They are below 50 everywhere, meaning that the industrial sector is contracting in most countries and regions.

That may change soon. The  major cause of slowed industrial activity — the U.S.-China trade war — could be reversing course. That is, both sides have agreed to work on a series of “mini” trade deals, and they say they are close to signing the first “mini” deal. The market is interpreting this development as a sign of a permanent relaxation of global trade tensions. With trade tensions easing, industrial economic activity will pick back up, and demand for oil will get a big boost.

That big demand boost should naturally boost oil prices. As those oil prices move higher, so should BP stock.

The Bottom Line on BP Stock

BP stock isn’t a great investment. But right now,  it should work. BP stock price should move higher as oil prices move higher, thanks to increasing global demand as trade tensions ease. At the same time, BP PLC stock will pays a nice 6.3% yield.

Ultimately, over the next few quarters, BP shareholders will likely benefit from both slight share price gains and a high dividend yield. For many investors, that’s a winning combination.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media,

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