Are BP shares a slam-dunk buy as oil prices rocket – or is there a hidden danger?

Because the FTSE 100 plunged yesterday on conflict in Iran, BP (LSE: BP) shares ended the day larger. That stunned exactly no one.

Two sectors had been apparent beneficiaries of preventing within the Center East: defence shares and oil and gasoline. FTSE 100 weapons maker BAE Techniques duly jumped 6.11% on Monday (2 March), whereas BP climbed a extra modest 2.11%. In the present day, the oil large’s shares are flat. Given the surge in crude, that feels restrained.

There’s nothing sluggish concerning the oil value. On the finish of final week, Brent crude traded at round $72 a barrel. It ended Monday at $79 and has since climbed previous $83. The oil value is up by roughly a third this 12 months, and a few analysts are speaking about $100 or even $120 if the battle drags on.

Power value query mark

Iran has threatened to “assault and set ablaze” any ship making an attempt to cross by the essential Strait of Hormuz, the place a fifth of the world’s oil and gasoline provide is shipped. Pure gasoline prices have additionally spiked after QatarEnergy halted manufacturing following army assaults on its services.

US crude inventories at the moment stand at round 435m barrels, roughly 3% beneath the five-year common for this time of 12 months. Europe’s reserves have been depleted by a chilly winter. If this conflict drags on for a month, provide will get very squeezed. So why aren’t BP shares going by the roof, as they did after Russia invaded Ukraine?

BP is not a pure play on the oil value, nevertheless it is shut. In principle, a sustained spike ought to increase money circulation and earnings. But markets are forward-looking and the longer-term image could also be extra difficult.

Present occasions additionally pose longer-term dangers for the oil majors. Excessive value spikes can crush demand and tip main economies into recession, finally destroying the very consumption development that underpins oil firm earnings. Additionally, one other provide shock may speed up the political and company push in the direction of vitality independence, with governments doubling down on renewables and electrification to cut back publicity to unstable fossil gasoline markets. Whereas battle might raise crude within the quick time period, it may finally strengthen the case for transferring away from oil altogether.

A number of danger out there

One other danger is that durations of surging earnings typically finish in calls for for windfall taxes and tighter regulation, limiting how a lot the enterprise and shareholders finally profit.

There’s a lot of conjecture there. However proper now we’re in a place the place just about something may occur. I maintain BP shares, and this week they’ve helped offset a few of the losses throughout my portfolio, though not as a lot as I’d have anticipated. I’ll proceed to carry them, as a result of I believe oil and gasoline nonetheless has a key position to play within the international financial system, regardless of the inexperienced transition. However there’s an terrible lot of danger out there in the present day, and occasions might not go the way in which traders anticipate. I believe BP shares are nonetheless price contemplating, however they’re not a slam-dunk buy.