The oil price has enjoyed a strong start to the year. The price of West Texas Intermediate has risen over 10% since the start of the year, and now trades around $52 per barrel. With several banks forecasting the price to rise further over the course of 2021, it bodes well for companies in the oil industry.
There are several oil stocks within the FTSE 100 and FTSE 250 that can provide exposure for investors. After having looked into a few, BP (LSE:BP) is my one pick for this year. This is down to a mix of internal and external factors.
It’s good to be green
With victory in the recent US election, Joe Biden’s manifesto contained a lot of focus on green energy. Biden himself argued that his spending package would go further than the previously announced “green new deal”.
For global oil companies, this shift has been coming for a while. But it’s now here. Fortunately, BP is ahead of the curve in this regard. It needs to be, as around 25% of upstream revenue comes from the US, and 33% of downstream revenue.
It’s investing $5bn a year into renewable energy and, last month, it announced a green energy deal with Amazon. The deal means BP will provide the energy to Amazon Web Services data centres. All of the energy provided will be from renewable sources.
Some might argue this is more of a PR stunt than anything else, but it’s an expensive one if so and it does show BP is thinking smart. As a business, it’s not just focusing on being a top oil stock for investors today, but trying to be a broader top energy stock of the future.
A strong oil price
Even with the push towards green energy, the oil price will continue to be a key driver for BP in 2021. The reliance it has on oil was shown in the trading update for Q2 last year. At a time when the oil price fell significantly, Q2 results showed a loss of $16.8bn. The write-downs were “principally resulting from a review of BP’s long-term strategic plans and revisions to long-term price assumptions, combined with the impact of lower oil and gas prices”.
As mentioned at the start, the outlook for oil is now much more positive. Firstly, demand for oil via refined products should be higher than last year, with global travel and transportation expected to return to more normal levels.
Secondly, tensions in the Middle East have eased in recent months. The coming together of Saudi Arabia and Qatar last week is another step in the right direction, which should help to quell oil price volatility.
All of this should help BP to be a top sector stock, due to the correlation it exhibits. For example, the BP share price is up around 15% in the same period the oil price is up 10%. If we see the oil price continue to move higher, then it’s logical to think the BP share price will also benefit.
Overall, BP looks an attractive buy to me at the moment. The front-running of needing to push towards green energy, along with the high correlation to the underlying oil price, could see a strong performance for 2021.
