The strong oil price continues to help UK oil majors such as Shell and BP (LSE: BP). When oil selling prices are high, that translates directly into bigger profits for producers like these. That helps explain why the BP share price has increased by more than half over the past year. In this morning’s trading it hit a new 12-month high. Can this momentum keep going – and ought I to add to the shares to my portfolio in anticipation?
Industry tailwinds
The short answer in my opinion is that, despite cresting to a new high, the BP share price could indeed keep rising. Although a number of factors influence the company valuation, I reckon that if energy prices move up much more from where they are today, that could well boost BP shares.
There is definitely reason to believe that energy prices could keep rising. During the pandemic a lot of companies slashed their exploration and development budgets. That is now coming home to roost, as supply has tightened. That is a long-term structural issue and could support high prices in coming years. On top of that, the war in Ukraine has led to dramatic changes in global oil supply. They could continue and may also contribute to even higher energy prices in future.
However, the opposite could happen. We have seen many times that oil is a cyclical business. Higher prices will reduce some discretionary demand for energy. Big producing countries may be tempted to pump more oil to take advantage of prices. An industry awash with cash and eyeing massive profits may restart mothballed projects, leading to increased production. That could push oil prices down, which I think would be bad news for the BP share price.
BP or not BP?
In fact, I reckon that the high BP share price seen today has more to do with the industry trends as a whole than the company specifically. Shell touched a price within 3% of its 12-month high today as well.
On that basis, if I was bullish about oil prices and wanted to expose my portfolio to the sector, I would consider whether buying BP shares was the best way to do it. After all, it demonstrated a willingness to cut its dividend during the pandemic while rivals like Exxon stuck with theirs. That is why Exxon is a Dividend Aristocrat unlike BP.
BP has also been trying to reshape itself into a much broader type of energy company rather than focusing just on fossil fuels. But I think the business model for some non-fossil-fuel energy sources remains unproven. That might mean that BP’s profit margins in the coming decade do not match those of some more focused rivals.
My move on the BP share price
So I do think oil prices may stay high and even rise more in coming months as winter bites. In that case the BP share price may move above the year high it hit today.
But I am more attracted to some rival oil companies with what I see as a more targeted strategy and better record of dividend maintenance. I will not be acting on the surging BP share price.