Does the oil price spike leave BP shares vulnerable to a sudden crash?

BP (LSE: BP) shares are on the up. Just a few weeks ago there was talk of the oil price falling to $40. On Monday (9 March), it shot past $100. It has dropped since but some analysts reckon crude could hit $150 or even $200 if the Iran war drags on. Should investors be excited – or worried?

The BP share price isn’t purely a play on oil. Revenues and profits are also shaped by refining margins, trading operations, petrochemical demand, gas production and currency movements. Yet the oil price still has a huge influence on performance. We saw that in 2022. When Russia invaded Ukraine, Brent crude surged to $116 a barrel, and BP shares surged too. When the energy shock eased, they slumped. Then investors started to look more closely at the underlying business, and weren’t impressed.

Volatile FTSE 100 stock

The company had pushed hard into renewables, only to panic and backtrack. CEO Bernard Looney left under a personal cloud, and successor Murray Auchincloss didn’t last long. BP carries a sizeable debt pile of roughly $24bn. Activist investors continue to circle. New CEO Meg O’Neill has a lot on her plate.

That may help explain why BP shares have lagged Shell lately. BP is up 6.5% in the last month, Shell has climbed almost 13%. Investors perhaps feel the rival oil major is in better shape.

Last month’s results failed to excite. BP reported Q4 profit of about $1.5bn. That was 32% higher than a year earlier but well below Q2’s $2.4bn and Q3’s $2.2bn. Worse, the company disappointed investors by pausing its share buyback, which had been running at about $750m a quarter. Management said the cash was needed to strengthen the balance sheet.

No share buyback, lots of debt

At the time, BP noted that crude prices had fallen roughly 20% in a year amid oversupply and would probably keep falling.That forecast has aged like milk. So will oil hit the heights?

A lot more than the BP share price depends on the answer. The health of Western economies are at stake too. In that sense, BP can act as a handy portfolio diversifie, and help offset losses elsewhere. This could go either way and given the complexities of the Iran conflict, nobody can say for sure.

I still think the shares are worth considering, especially with a trailing dividend yield of 5%. But buying purely in the hope of a further oil price spike is risky. If a peace deal emerges or Donald Trump declares victory, crude could just as quickly fall. BP shares would almost certainly follow.

I hold the oil giant and plan to continue doing so. But anyone considering buying BP today should take a long-term view. Boardroom upheaval and the energy transition remain real challenges, but over time I believe the company could still deliver bags of dividend income and growth. In the short term, anything could happen.

There are plenty of other interesting opportunities on the FTSE 100 today, many of which have fallen recently rather than surged. Investors should check them out too.

The post Does the oil price spike leave BP shares vulnerable to a sudden crash? appeared first on The Motley Fool UK.

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Harvey Jones has positions in Bp P.l.c. 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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