Crude Oil prices
BP share price has declined by more than 44% in the past year. It has performed better than Royal Dutch Shell, whose share price has dropped by more than 52%. But it has also underperformed the FTSE 100, which has declined by about 20%. The same trend goes way back. For example, the two energy groups have dropped by more than 30% in the past five years. BP stock price is now trading at 309p, which is above the YTD low of 222p. That is a 40% gain.
So, does this mean that BP shares are now a buy? Here are the three reasons you should not invest in BP.
As an oil supermajor, BP performs well when crude oil price is rising. And in the past two months, crude oil has been among the best-performing asset. For one, WTI has moved from the negative territory to more than $40 per barrel. That is part of the reason why BP share price has been rising.
However, there are reasons to believe that prices will either be low for a longer period or volatile. First, the rising crude oil prices will incentivise more shale companies to come back because of the cyclical nature of the energy sector.
While several shale companies, including Chesapeake Energy, have gone bankrupt, the reality is that we are still in a low interest rate environment. This means that their operations will be taken over by leaner companies, which will lead to higher production. To be clear, because of the nature of shale rigs, this could take a few months. As a result, the longer-term forecast of $55 per barrel that BP made in June seems a bit optimistic.
We are in an energy revolution and BP and other big oil companies could suffer. In a statement earlier today, an analyst at Goldman Sachs said that big oil would turn to be big tobacco. This is a dangerous predicament since big tobacco is known for the large taxes it pays. For example, when announcing the huge EU recovery fund, the European Commission said that taxes to companies like BP would help pay for it. That is not a good thing for BP share price.
More people are getting serious about climate change. And most governments, especially in Europe, have announced large clean energy investments. While BP too has announced a shift to clean energy, this shift will be expensive.
Another important reason not to buy BP share price is that there are better opportunities out there. For one, there is a possibility that BP will slash its dividend as Royal Dutch Shell did recently. This will remove one reason why most people own the stock. Another reason is that there are better opportunities in the market. For example, there are companies like Ocado, Rightmove, Just Eat, and Avast that are seeing impressive growth.
On the daily chart, BP share price is below the 50-day and 100-day exponential moving averages. The price is also along the 23.6% Fibonacci retracement level. It is also forming a bearish pennant pattern, which means that it will possibly decline in the next few months as bears attempt to move below the support at 285p.
On the other hand, a move above 351p will invalidate this trend. This price is along the 38.2% retracement and slightly above the 100-day EMA.