BP (LSE:BP) shares rose on Monday morning along with other energy stocks. Oil prices reversed losses and edged up amid concerns of tight supply due to lower OPEC output. These concerns have been compounded by further unrest in Libya and sanctions on Russia.
The stock has been pretty volatile in recent months, falling 15% in just one week in June. But it’s still up over the year and rose more than 3% in early trading on Monday. So, what behind the volatility and am I too late to buy?
Volatility this year
Many factors have influenced the BP share price this year.
Oil prices have surged in 2022, which has pushed energy firms higher. However, in Q1 BP was forced to take a massive $24bn writedown after its decision to leave the Russian market. The oil giant withdrew from its 19.75% stake in Rosneft and two other joint ventures.
Despite the overall gains, the stock was pushed lower in June amid negative economic data. As mentioned, BP shares lost 15% of their value in five days as US inflation data came in higher than expected and China enacted more sporadic Covid-19 lockdowns. There were also negative economic forecasts for the UK and Germany.
Performance
Despite the writedown, replacement cost profit (BP’s measure of net earnings) rose to $6.25bn in the first quarter from $2.63bn a year ago. Earnings have soared as the price of benchmark crudes remain above $100 a barrel.
As a result, Q2 earnings could surpass those achieved in the first quarter. Brent Crude is currently trading for around $112 a barrel. This means the hydrocarbons giant will be making a considerable margin on every barrel.
Prospects
The profitability of a company like BP is largely dependent on the price of oil and the margins it can make.
At the current price, BP is hugely profitable, but this is a cyclical industry and that’s why oil companies typically trade with lower price-to-earnings ratios when they’re doing well.
However, there are signs that we’re entering a new, higher-for-longer oil price environment. New research from the International Energy Agency (IEA) suggests global oil demand will reach fresh highs in 2023.
OPEC+ recently agreed to increase production by 648,000 barrels a day, but it seems unlikely that the oil producing nations will have the capacity to hit the target. The increase would essentially mean the end of the supply cuts put in place in the wake of Covid-19.
But there’s a fine line between under and oversupply. Lockdowns in China and lower economic growth in the West would see demand for oil go down. These are all things that the market is trying to predict.
Will I buy BP stock?
So, am I too late to buy BP stock? Well, I actually wouldn’t buy it right now, despite the forecasts of higher oil prices over the next year.
I’m concerned about demand disruption in the near term. Oil prices can go down a lot quicker than they went up this year. So because of that, I’ll keep BP on my watchlist, but I won’t be buying any time soon.