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I BP (LSE: BP) share price is flying again after a difficult few years. I wish I could put that down to a smart management reset following years of boardroom uncertainty and confusing green strategy, but it’s not. Apparently, it is in the midst of a war in Iran, which has driven the price of oil down from around $60 a barrel in January to $104 this morning (March 18). Can this continue?
I added the FTSE 100 oil and gas giant in my SIPP 18 months ago and had mixed feelings from the start. I’m not entirely comfortable subsidizing a fossil fuel giant because of climate concerns. I was afraid of being on the wrong side of history, both morally and financially.
Cyclic recovery
A solid profit helps alleviate some fears. With BP shares yielding 6% annually, I hit the Buy button. While early performance was disappointing, I sat back and waited for cyclical upswings. And now it’s here. It is possible.
BP shares have fallen over 20% in the past month, offsetting losses elsewhere in my SIPP, although nowhere near all of it sadly. How should investors approach BP today?
In the short term, with caution. Oil prices can change dramatically in events beyond the control of any company. Geopolitics, supply disruptions, OPEC decisions, global demand and economic growth all feed for junk food. Today, there is Iran. The headlines are embarrassing. There is talk of oil jumping to $150 or $200, if the Strait of Hormuz remains closed for a long time. However, it actually reversed yesterday, and today. So are BP shares.
A long-term view
Markets don’t move in straight lines, even if the headlines suggest they should. So anyone chasing quick gains can get caught. In The Motley Foolwe always recommend buying stocks with a long-term perspective. In the coming days, the Iran war and the price of BP could go either way. The smartest analyst in the world cannot tell what will happen.
The long-term case is clearer. Despite all the talk of revolution, the world still needs oil and gas. The war in Iran proves that. Fossil fuels will be needed for basic energy, say, when the wind doesn’t blow or the sun doesn’t shine. Oil also supports everything from plastics to chemicals and manufacturing. That need will not disappear overnight.
BP may be a bit of a fixture in the global economy, but it’s unlikely to disappear anytime soon. That gives it a role for decades, as the energy mix changes.
Building wealth gradually
Chasing BP for short-term gains is a gamble. Taking a long-term view makes more sense. Those worried about overpaying following the recent jump can throw money into the stock, to smooth out the volatility. The real rewards from stocks come over the years, such as reinvested dividends and building stock price growth and compounding. Yields trailing BP have fallen in recent days, but are still attractive at 4.5% per annum.
Investors who think BP’s share price can only rise as the Middle East conflicts continue should think twice. But from a long-term perspective, I think it’s worth considering as part of a balanced portfolio.
