Does the BP share price jump make sense? - The Motley Fool UK
Hermione Taylor | Friday, 8th October, 2021 | More on: BP
If you spent the weekend queuing for petrol like me, you might have also found yourself killing time by looking at the petrol prices on the signs at the forecourt. The RAC warned this week that fuel prices could reach an all-time high by Christmas. And the average price of a full tank of fuel is now about £12 higher than a year ago. With BP (LSE: BP) operating 1,200 petrol stations in the UK, it seems the company is well placed to profit from both higher fuel prices and demand.
But do rising fuel prices completely explain its share price jump. And could BP work for me as a longer-term investment?
What made the BP share price rise?
Over the past 12 months, the BP share price has jumped from around 220p to 344p. However, most of the growth happened this month, with the share price still under 300p at the start of September. The first thing that strikes me is how well-placed BP is to benefit from increased demand for petrol. This is thanks to its strong presence in the UK petrol market. I bet a lot of people have been thinking the same thing. This led me to wonder if the BP share price jump might be down to the Keynesian Beauty Contest theory of the stock market.
Celebrated economist Keynes came up with an analogy for the stock market based on a contest run by a London newspaper. In this contest, entrants were asked to choose the six most beautiful women from a set of 100. Those that chose the most popular faces would then be entered into a raffle to win a prize. Keynes argued that the skill was not actually in picking the most beautiful face, but rather picking the face that most people thought the most beautiful. His theory was that investors can behave in a similar way. They choose stocks based not on fundamentals, but on predictions of what they think the market will do anyway. Long queues at petrol pumps may persuade investors more people will want BP shares. So could this be enough to make the BP share price jump again?
I’m not so sure. First, fundamentals matter to me. I’m very aware that BP operates on a bigger scale than just the UK and is about more than retail petrol sales. So giving UK petrol problems too much weighting could be a mistake. In the longer term, BP remains vulnerable to changes in oil prices. Yes, oil prices have just broken the $80 a dollar mark for the first time in almost two years. But prices fell to just over $20 a barrel during lockdown. This hit BP’s profits hard, and it posted a second quarter loss of $16,848m last year. Q2 results look brighter this year and it.s hoping an oil price above $60 a barrel will allow it to deliver a dividend of 4% per share. Will oil prices stay high? If the recovery continues at pace, I think they could; but this remains a considerable risk.
So where does that leave me as a potential buyer? Overall, I wonder if I’ve missed the boat. The BP share price may jump again in the short term, but I’m not convinced long term. And I’m reluctant to get involved in a Keynesian beauty contest!