BP (LSE:BP) shares had been going from strength to strength this year. However, the oil and gas giant’s share price plummeted last week, along with the rest of the index. BP shares are down 15% over the past five days.
The fall
The FTSE 100 and other global markets fell last week on the back of negative economic data. US inflation, in particular, came in higher than expected. There were also negative economic forecasts for the UK and Germany. And this was compounded by sporadic Covid-19-related lockdowns in China.
Benchmark crude prices fell on the back of this information. Brent crude is currently trading for $111 a barrel, down from over $120.
Credit Suisse also raised Shell to “outperform” but initiated coverage of BP at “neutral“. The bank said BP’s near-term plan to grow its Customers & Mobility theme may leave it exposed to scaling back its targets.
Prospects
But BP and its peers have been making record profits as oil prices soared. New research from the International Energy Agency (IEA) suggests global oil demand will reach new highs in 2023. This is certainly good news for oil and gas giants.
In its monthly report, the watchdog said demand was likely to rise by 2.2m barrels per day, or 2.2% year-on-year, to 101.6m bpd in 2023. Total demand would exceed pre-pandemic levels.
The IEA also said supply would struggle to keep up with demand, suggesting oil prices will continue to rise. However, such forecasting is based on assumptions that may not be sustained.
Chinese lockdowns remain a threat to oil demand. China’s Covid-zero policy has sparked sporadic lockdowns in Beijing, Shanghai and now Shenzhen. This hurts economic activity and, specifically, demand for hydrocarbons.
Profitability
BP’s profitability is dependent on oil prices and, at the current price, BP is making a lot of money. It also has a relatively low break-even point too. In 2020, the firm said it was working to reduce its break-even price to $35 a barrel by 2021.
However, I’d expect the break-even point to be slightly higher right now. With oil prices soaring, BP will want all its assets on-line and to ensure that every barrel is extracted from its wells. So recovery costs might be elevated as a result.
Would I buy BP shares?
Would I buy BP stock? This is a difficult one as there has been plenty of commodity volatility in recent years. I have also stayed clear of oil and gas companies in recent months, expecting there to be a fall.
But at today’s price, I’d actually be willing to buy this stock. Although I’m still concerned about the windfall tax in the UK and the impact of Chinese lockdowns on the oil price, the IEA forecast is pretty positive for BP and its peers.