The BP (LSE: BP) share price hit a low of 193p on 29 October 2020. At 336p today, it’s now at its highest price since the stock market mini-crash of March 2020. Since it was at 589p only three years ago, there could be further upside ahead.
However, I expect the BP share price to be volatile on the way up. That means, if I’m going to buy in, I may not be able to touch that money in the near future. Should I buy now, or wait?
BP share price financials
The BP share price has increased with the rising price of oil. Brent crude — the most highly traded oil benchmark — is trading at around $80 a barrel. That’s its highest price since October 2018 and a 55% rise year-to-date. Vitol Group, the world’s largest independent oil trader, expects global demand for crude oil to increase by 500,000 barrels a day over the winter. So in the short term, the BP share price could continue to rise.
BP’s Q2 2021 results were great for shareholders. CEO Bernard Looney commented that it was “another quarter of strong performance, while investing for the future in a disciplined way”. It reported a $3.1bn profit, and $5.4bn in operating cash flow. It’s also reduced its debt to $32.7bn, and is expecting to execute $1.4bn of share buybacks in Q3. Moreover, the company is expecting to rake in even more profit over the next few years, allowing for an “annual increase in the dividend per ordinary share of around 4%, through 2025”.
The oil factor
But I think the high price of oil is a result of increased short-term demand.
When the pandemic hit, demand for oil fell drastically. In April 2020, oil prices actually fell below zero for the first time ever. That’s because it’s impossible to completely stop production without damaging drilling equipment.
As the global economy reopened, demand started to rise, while supply stayed low. That’s because it takes time for oil producers to ramp up production. Hurricanes Ida and Nicholas have damaged important US oil drilling sites, restraining production. At the same time, gas prices have surged, making oil a cheaper fuel alternative. And inevitably, demand for oil is only going to increase over the colder winter months.
However, these factors are all temporary. And when the oil price starts to slide downwards, the BP share price is likely to go with it. However, the company has a long-term plan to prevent its decline.
The renewable shift
BP knows that as the world turns towards renewable alternatives, the demand for oil will fall. And regardless, oil wells will run dry before the end of the century. So last year, BP set out a plan to reduce oil production by 40% by 2030. It’s selling multiple oil producing assets and using the money to invest in renewable alternatives. It’s already investing more in renewables than the core oil business. By 2030, it’ll be investing $5bn a year in green energy projects. But it’s going to take until at least 2025 before they become profitable.
The long-term future of the BP share price depends on this shift to renewable energy. I think I’ll wait a few years to see how it pans out. I’m expecting some great bargains during October and I want to keep some cash free for next month.
Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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