OPEC Announcement Hurts BP Stock
Oil prices took another tumble earlier this week, erasing gains from last Thursday and Friday. Major oil producers like BP plc (ADR) (NYSE:BP) were hit squarely on the chin, with BP stock, in particular, sliding nearly two percent in the morning trading hours.
BP stock was weighed down by falling oil prices and a huge fine levied by the U.S. government. Remember the 2010 Deepwater Horizon oil spill in the Gulf of Mexico? BP just settled the penalty for that spill. (Source: “U.S., BP Finalize $20.8 Billion Deepwater Oil Spill Settlement,” Wall Street Journal, October 5, 2015.)
Also, crude prices swung wildly as the market digested new information from the Organization of the Petroleum Exporting Countries’ (OPEC) monthly market report. According to OPEC, the United States is expected to see its oil production fall for the first time in eight years.
Many analysts turned bullish on crude prices, seeing the news as an indication that supply was finally rebalancing. Then a second piece of information became relevant: OPEC was keeping a grip on its market share by boosting output. After markets absorbed that news, things turned ugly for major oil producers like BP plc.
However, investors should remember that timing the supply crunch is less important than understanding its inevitability. Today, tomorrow, or a week from now, the reduction of oil production is a verified trend.
Small- to medium-sized U.S. oil producers cannot weather a low-price environment, which OPEC knows well and good. By pushing output higher and keeping prices low, OPEC took advantage of the crisis to push its rivals past the brink of insolvency.
Now that OPEC smells blood, expect it to push a little harder.
BP Stock Cushioned by 6.7% Yield
Luckily for BP investors, the price crunch is only temporary. OPEC is trying to crush its rivals by letting prices fall. Make no mistake; the strategy is working.
The U.S. shale boom and reentry of Libyan oil devastated oil prices. We saw crude prices collapse in October of last year as markets factored in the additional supply. BP stock was caught in the fallout, losing roughly 15% of its market value along the way.
By November, OPEC met to discuss a response to the oil price decline. It decided to do nothing. The oil price decline became a convenient cover for a price war.
More than half of all American oil rigs have stagnated since then. U.S. output in August and September was down an average of 330,000 barrels per day from June and July. Once OPEC has pushed enough competitors into the red, the organization will let oil prices go higher. (Source: “OPEC Sees U.S. Oil Output Falling for First Time in Eight Years,” Bloomberg, October 12, 2015.) At this point, it’s just a waiting game.
In the meantime, investors can take solace in a 6.7% yield from BP plc; a nearly seven-percent return for holding BP stock should be a no-brainer for any sane investor.
Maybe the massive fine BP plc just paid is holding you back. After all, $20.0 billion is no joke. Investigators found that BP was grossly negligent in the Deepwater incident, which dramatically increased the price tag for the scandal. However, the settlement closes an ugly chapter in BP’s history.
Why BP Stock Could Rise Again This Week
Let’s reassess the two factors dragging down BP stock: the oil price decline and the big settlement cost.
We’ve already worked out that OPEC is waging a price war, which means this isn’t the natural price for crude oil. Once OPEC is done decimating its rivals, the organization will let oil prices appreciate, inflating the bottom line and boosting Lamborghini sales across the Middle East. Because BP plc is large enough to weather the price rout, it’ll get caught in the updraft.
As for the settlement, it’s over. The massive fine will bleed BP’s cash flow, but investors in BP stock can at least appreciate an end to the saga. The one-time cost will finally put to rest the most heinous saga in BP’s history.
As investors realize the short-term nature of these concerns, they will turn their eye to the future. BP stock will rise on the inevitability of an oil price rise.