Although it’s trying to go more green in the future, BP (LSE: BP) currently depends a lot on oil. Given the considerable role OPEC+ (which is OPEC plus other countries such as Russia) plays in oil prices, here’s how I think the recent OPEC+ decision will affect the BP share price and what I’d do as a result.
OPEC+ decision
Recently, OPEC+ decided to keep oil production levels mostly the same, with a couple of modest exceptions for Kazakhstan and Russia. According to the deal concerning production in April, Russia could increase its production by 130,000 barrels per day, and Kazakhstan could increase its production by 20,000 barrels per day.
Given how much oil prices have rallied since November, many in the market expected OPEC+ to increase production more meaningfully. Saudi Arabia also committed to extending its voluntary 1m per day production cut into April too (although it’s not clear what will happen after that).
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With the OPEC+ decision, it seems the oil ministers want to see more signs of a demand recovery for oil, a commodity that the pandemic has negatively affected. Due mainly to the coronavirus outbreak, demand for oil fell by around 9.8m barrels a day last year as lockdowns and economic weakness weighed on the commodity.
With the various vaccine rollouts and China’s economy growing rather quickly, however, analysts expect a different outcome for this year. Specifically, OPEC+ sees demand rising by 5.79m per day to around 96.05m barrels per day for 2021.
How I reckon the decision affects BP
Due to the surprise OPEC+ decision, oil prices rose even further (at least initially). Given that BP generally makes more money if oil prices increase, I reckon the oil giant should benefit as a result. I think the decision could also help the BP share price, at least in the near term.
With that said, the OPEC+ decision isn’t permanent. OPEC+ will meet again in the beginning of next month to debate May production levels. Many OPEC+ countries have incentive to produce more oil if the commodity price is higher so it remains to be seen how long they can agree to hold production low.
Despite the rally, the price of oil is still highly uncertain as well. Electric vehicle adoption and government mandates for lower carbon emissions are clear headwinds. In early March, Volvo became the latest company to announce a goal of going all electric in the future. Volvo Cars chief technology officer Henrik Green said, “There is no long-term future for cars with an internal combustion engine. We are firmly committed to becoming an electric-only car maker and the transition should happen by 2030“.
If oil prices decline, the BP share price might not do well.
The BP share price: what I’d do
I’d buy and hold the stock given the current BP share price.
Although I don’t know what will happen to the price of oil, I think BP management will succeed in its green transition. The company has a lot of resources and world class research and development to help it.
