Despite Challenges, BP Could Still Head Higher in the Near Term

After a tough 2020, things are looking up for BP (NYSE:BP) stock. With crude oil prices back up above $50 per barrel, shares in the global energy giant continue to bounce back. But, while this, along with vaccine optimism, has already begun to be priced into this and other integrated oil and gas plays, things may only be getting warmed up.

BP stock
Source: FotograFFF /

That is to say, there’s plenty of runway left with the energy sector recovery. The novel coronavirus  pandemic continues to impact the globe. The sudden pivot by businesses and governments toward “green” policies may also be a bad sign for this hard-hit sector. Yet, while it’s out-of-favor, big oil is here to stay for the time being.

Sure, long-term prospects are questionable. But, in the coming year, risk/return looks firmly in your favor with this and other energy stocks. We may not see shares fully recover to pre-pandemic price levels (around $40 per share). But, an additional surge toward $30 per share is attainable.

So, what’s the play? Many risks are still on the table. But, consider this still a solid recovery play at today’s prices ($24 per share).

What the Oil Rebound Means for BP Stock

With the pandemic still hurting global demand, why are oil prices surging again? Chalk it up to Saudi Arabia’s surprise oil production cut announced on Jan. 6. The major oil producing country agreed to this to allow other members of OPEC+ to maintain current oil production levels. Or, in the case of Russia and Kazakhstan, increase their oil output.

As a result, oil’s back above $50 per barrel. And, BP stock and its peers have had a great start to 2021. But, will this resurgence in oil prices last? Some analysts, like RBC’s Michael Tran, are skeptical. With the crack spread (price difference between crude oil, and refined petroleum products) below where it usually is when oil is at this price levels, he doesn’t see Saudi Arabia’s move as enough to sustain the recent run-up.

Analysts at Goldman Sachs hold a similar view, saying this recent move by the Saudis “likely reflects signs of weakening demand as lockdown demand.” Yet, despite this take, Goldman maintains a forecast of Brent crude hitting $65 per barrel by December 2021 (Brent currently trades for around $54.75 per barrel).

But, it’s not just decisions from major petroleum producing countries that could hurt the bull case (near and long term) for BP stock. As major economies accelerate the pivot toward “green” alternatives to fossil fuels, it’s understandable why many are concerned about diving into this hard-hit sector.

Long-Term Uncertainty Remains

As this editorial on put it on Jan. 7, “the real crisis for oil is yet to come.” Why? The bearish article points to two major factors. Firstly, forecasts (including from BP itself) stating oil demand peaked in 2019. Secondly, the pivot by both governments and business toward a zero-net emissions future.

In short, the oil industry faces a long-term existential crisis. Given the move toward EVs and other “green” alternatives doesn’t seem to be slowing down, how can BP stock, right now entirely dependent on fossil fuel demand, expect to generate sufficient returns for investors?

Granted, BP sees the writing on the wall. As my colleague Dana Blakenhorn discussed back in December, the oil and gas giant has begun pivoting away from oil, as seen from its investments in alternative energy businesses. But, this is still an oil stock. Only time will tell whether recent moves in the alternative energy spaces are being done for PR purposes. Or, if the venerable UK-based oil giant is actually evolving into a more green-friendly energy purveyor.

However, it’s not as if both near-term (pandemic) and long-term (“end of oil”) headwinds haven’t already been heavily priced into BP stock. Shares have more room to recover, as investors re-assess their dire forecast for the sector.

Despite Concerns, Still a Solid Near-Term Recovery Play

Yet, while the long-term case looks uncertain, near term this could still be a great opportunity. EV stocks like Tesla (NASDAQ:TSLA) continue to get way ahead of themselves, a situation not too dissimilar to what happened during the Dotcom bubble more than 20 years ago.

To put it another way, the future remains bright for the EV industry. But EV stocks are more likely than not to crash/correct in 2021, just like internet stocks did in 2001. How does this relate to oil plays like BP? Once investors realize the green pivot won’t be as rapid as currently predicted, investors will stop pricing-in an immediate demise of the oil and gas sector.

Coupled with solid prospects for a demand recovery (albeit choppy) in 2021, BP stock has room to continue bouncing back, toward $30 per share (and beyond).

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

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