Wait for Oil to Stabilize Before Loading up on BP Stock

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BP (NYSE:BP) has had the same difficulties many other energy company have faced over the last few months but recent developments have changed the way we have to understand BP stock.

Wait for Oil to Stabilize Before Loading up on BP Stock

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The oil market is making all sorts of crazy headlines right now. The price of crude oil fell under $0 recently, even hitting negative $40 per barrel at one point. This has caused all sorts of ramifications for commodity and energy stock ETFs.

The United States Oil Fund (NYSEARCA:USO), for example, lost a third of its value in two days. That, in turn, has triggered trading jitters for individual energy companies.

So how are traders handling the unprecedented activity in the oil market? The instinctive reaction has been to buy energy shares. And in theory, that makes a lot of sense; the energy companies are a better way to play a rebound than buying the troubled oil ETFs outright. Still, there are some things you should consider before buying BP or other oil stocks right now.

How Oil Crashed Below Zero

On Monday, the financial media was published tons of stories about oil crashing below zero. And they were technically correct. But as you’ve seen if you’ve been to a gas station this week, energy still isn’t free, even if oil is theoretically available at no cost.

The key thing to know is that there are many prices of oil. There are different prices for oil in Europe, oil in the U.S., oil in Canada, and so on. There are also different prices depending on time. A barrel of oil you want delivered this week has a different cost than one you want to have shipped in 2021 or 2025. Add together this combination of different dates and different geographies and you get an astounding range of different oil prices.

The West Texas Intermediate “WTI” crude oil price you see on the news is for oil delivered at a repository in Cushing, Oklahoma. Even there, there’s more than one price as the quotations vary depending on the delivery date.

On Monday the price for May delivery WTI oil went below zero. However, oil in other markets, such as the benchmark European price, stayed far above zero. Also, all WTI prices other than May remained comfortably in positive territory. The dip below zero is tied to specifics around delivery of oil in a particular region of the country, along with some ill effects from an oil ETF that went haywire.

How This Impacts BP Stock

You could be forgiven for assuming that this oil crash would be a disaster for companies like BP. As it turns out, however, they aren’t actually selling any oil for negative prices. That one benchmark price only applies to a tiny fraction of the world oil trade.

Also, BP is an integrated oil company. That means that BP operates a full oil supply chain. It doesn’t just extract oil out of its wells, it also ships them to its refineries, turns that oil into gasoline, jet fuel, and other products, and then sells them at partner gas stations and via other channels. Thus, BP doesn’t have to passively sit back and accept whatever oil price is getting quoted in the news today.

Controlling the process from end-to-end gives BP a great deal more flexibility. Integrated oil giants such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and BP have survived past oil busts precisely because they are giant companies that derive profits from many different sources within the oil and gas industry. While temporary $0 oil may crush a few smaller energy players, big companies like BP will get by alright.

Challenges Ahead

Once you realize the commotion around negative oil prices is overblown, it’s tempting to try to profit from prices returning to normal. Be careful though. Just as negative oil prices aren’t a sign of doom for BP, a return to $20 or $30 oil will hardly be its salvation either. The oil market is greatly-oversupplied; the novel coronavirus has decimated demand. With airplanes grounded and folks not commuting, it’s no wonder that there’s too much oil.

Negative oil prices should resolve themselves quickly. It was a quirk driven by complexities of oil storage and a few ETFs that spiraled out of control. But the broader trends in the energy market will remain. Oil demand is way down, and it won’t be back to normal soon.

A company like BP has a ton of durable assets. But it was a challenge to generate enough cash to pay the dividend and grow operations even with oil up at $50/barrel. At half that price, BP now has tough choices to make. They may even need to trim the 11% dividend yield. Strong integrated companies like BP will survive, regardless of the oil crash, but times will be tough for a while.

BP Stock Verdict

I’d love to be more positive on BP today. I own the stock, and I’m underwater on my position. It’d be nice to average down and earn larger gains in the future.

That said, today is almost certainly not the right day for adding more exposure to BP and other energy stocks. It simply doesn’t make sense to keep throwing more money at the sector until we see some signs of stabilization in the crude oil markets.

Oil doesn’t need to go back to $4o or $50 per barrel immediately. But it does need to get to consistently positive territory and start seeing real demand come back in.

Right now, the crude oil market is in the worst meltdown of its history. Given that backdrop, the 30-50% run in energy stocks such as BP off the lows simply doesn’t make much sense. Patience will reward you with better entry points on these companies in the future. The oil glut won’t be solved overnight, and as such, energy stocks have more bumpy waters ahead.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned BP.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/wait-for-oil-to-stabilize-before-loading-up-on-bp-stock/.

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