BP (LSE: BP.) shares have fallen back close to where they traded before tensions in the Middle East escalated.
The market appears to have concluded that the worst of the disruption has passed and oil markets will soon return to normal.
But what if that conclusion is premature?
Looking beyond the oil price
What stands out to me is the inventory picture. The US Strategic Petroleum Reserve is at its lowest level in over four decades, while commercial inventories remain relatively tight.
At the same time, demand is entering what is typically the strongest period of the year. Summer driving in the Northern Hemisphere, alongside agricultural and industrial activity, tends to increase consumption in the third quarter. That means inventories can be drawn down quickly if supply disruptions persist for longer than expected.
Another factor is logistics. Even if geopolitical tensions ease, restoring normal shipping patterns is not as simple as flipping a switch. Vessels, crews and insurance providers all need confidence that conditions have stabilised before trade flows fully resume.
This is why I think the market may be treating the situation as a straightforward return to business as usual.
In reality, a disruption ending is not the same as the market returning to balance. Inventories still need to be rebuilt, supply chains need to normalise and spare capacity remains more limited than many investors assume.
For that reason, I am not convinced recent oil price weakness tells the full story.
Why I’m still watching BP
If the oil market remains tighter than investors expect, I think asset quality becomes increasingly important.
That’s one reason I continue to follow BP closely.
The company owns some of the most attractive oil and gas assets in the industry, with a portfolio increasingly concentrated around large-scale production hubs capable of generating strong cash flows across a range of commodity price environments.
Its US operations stand out in particular. Through a combination of offshore production in the Gulf of Mexico and onshore shale assets within bpx, BP has exposure to regions that remain among the most economically productive in the sector.
The company also retains significant positions in the Middle East and the Azerbaijan-Georgia-Türkiye corridor, providing access to long-life reserves and established export infrastructure.
What appeals to me is that the investment case does not rely on extreme oil prices. If markets tighten further, BP stands to benefit. But even if prices remain around current levels, the quality of the underlying asset base should continue to support substantial cash generation.
What’s the verdict?
Of course, oil remains a cyclical industry. A weaker global economy could reduce demand and put pressure on prices. Geopolitical risks also cut both ways, creating uncertainty around both supply and sentiment.
Even so, I think the market may be assuming a return to normality too quickly. Recent share price weakness suggests investors believe supply concerns are largely behind us. However, low inventories, depleted strategic reserves and ongoing logistical challenges point to a more nuanced picture.
If the oil market remains tighter than current prices imply, I believe BP’s high-quality asset base leaves it well positioned to benefit. That is why I continue to see the FTSE 100 stock as one investors may wish to consider.
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Andrew Mackie owns shares in BP.
