As the FTSE 100 plunged yesterday on war in Iran, BP (LSE: BP) shares ended the day higher. That surprised precisely nobody.
Two sectors were obvious beneficiaries of fighting in the Middle East: defence stocks and oil and gas. FTSE 100 weapons maker BAE Systems duly jumped 6.11% on Monday (2 March), while BP climbed a more modest 2.11%. Today, the oil giant’s shares are flat. Given the surge in crude, that feels restrained.
There’s nothing sluggish about the oil price. At the end of last week, Brent crude traded at around $72 a barrel. It ended Monday at $79 and has since climbed past $83. The oil price is up by roughly a third this year, and some analysts are talking about $100 or even $120 if the conflict drags on.
Energy price question mark
Iran has threatened to “attack and set ablaze” any ship attempting to cross through the crucial Strait of Hormuz, where a fifth of the world’s oil and gas supply is shipped. Natural gas prices have also spiked after QatarEnergy halted production following military attacks on its facilities.
US crude inventories currently stand at around 435m barrels, roughly 3% below the five-year average for this time of year. Europe’s reserves have been depleted by a cold winter. If this war drags on for a month, supply will get very squeezed. So why aren’t BP shares going through the roof, as they did after Russia invaded Ukraine?
BP is not a pure play on the oil price, but it is close. In theory, a sustained spike should boost cash flow and profits. Yet markets are forward-looking and the longer-term picture may be more complicated.
Current events also pose longer-term risks for the oil majors. Extreme price spikes can crush demand and tip major economies into recession, ultimately destroying the very consumption growth that underpins oil company profits. Also, another supply shock could accelerate the political and corporate push towards energy independence, with governments doubling down on renewables and electrification to reduce exposure to volatile fossil fuel markets. While conflict may lift crude in the short term, it could ultimately strengthen the case for moving away from oil altogether.
A lot of risk out there
Another risk is that periods of surging profits often end in demands for windfall taxes and tighter regulation, limiting how much the business and shareholders ultimately benefit.
There’s a lot of conjecture there. But right now we’re in a position where pretty much anything could happen. I hold BP shares, and this week they’ve helped offset some of the losses across my portfolio, although not as much as I would have expected. I’ll continue to hold them, because I think oil and gas still has a key role to play in the global economy, despite the green transition. But there’s an awful lot of risk out there today, and events may not go the way investors expect. I think BP shares are still worth considering, but they’re not a slam-dunk buy.
