Why the BP share price is dropping: oil market challenges and strategic shifts

BP's share price decline: a closer look at the driving factors

The BP share price has experienced a significant decline of over 12% year-to-date (YTD), compared to the Financial Times Stock Exchange (FTSE) 100’s 8% gain, prompting investors to closely examine the underlying factors. This downturn can be attributed to two primary causes: lower oil and gas prices impacting the company's profits, and increasing pressure from investors to accelerate BP's transition away from fossil fuels towards renewable energy sources.

The energy sector has faced considerable challenges in recent months, with oil prices falling sharply by around 20% from last year’s highs due to concerns about global economic growth and weakening demand. In the past month alone, West Texas Intermediate (WTI) crude oil futures dropped by approximately 13%, reaching levels not seen since May 2023 (and December 2021 for Brent crude oil).

This decline in oil prices has directly affected oil companies like BP, putting downward pressure on their share prices. As a result, investors are reassessing their positions in energy stocks, considering both short-term market conditions and long-term industry trends.

The impact of falling oil prices on BP and the energy sector

The recent steep drop in oil prices can be attributed to several factors, all of which have significant implications for BP and the broader energy sector. Disappointing US jobs data, coupled with weak labour market signals, have raised concerns about potential cracks in the economy. This, combined with sluggish European economic data, has compounded worries over eroding energy demand.

Additionally, ongoing unease about soft consumption and disinflationary pressures in China, the world's largest crude oil importer, has further spooked traders. These macroeconomic factors have led to a pessimistic outlook for oil demand, with Organization of the Petroleum Exporting Countries (OPEC+), the Energy Information Administration (EIA) and Bank of America lowering their 2024 and 2025 price outlook for crude oil.

According to the latest Commitment of Traders (COT) report published by the US Commodity Futures Trading Commission, speculative traders are the most bearish on oil prices in over a decade. Furthermore the net long position held by money managers in crude oil futures has plunged to its lowest level since October 2012.

The supply side of the equation is also putting pressure on oil prices. Despite OPEC+ postponing its planned production increment, ample supply and high US stockpiles continue to weigh on prices.

WTI crude oil monthly candlestick chart

BP's strategic shift: divesting US onshore wind business

In response to these market pressures and the need to align with its long-term strategy, BP has announced plans to divest its onshore wind business in the United States. The energy giant states that these assets are not aligned with its focus on growth, and the sale process is set to commence in the autumn of 2024.

This decision involves interests in ten operating onshore wind energy assets across seven states in the US, valued at approximately $2 billion. The move comes at a time when several offshore wind companies have cancelled or renegotiated power contracts for planned US projects, citing rising material costs, high interest rates, and supply chain challenges.

BP's decision to sell its US onshore wind business reflects the company's strategic reassessment of its renewable energy portfolio. While the company remains committed to transitioning towards cleaner energy sources, this move suggests a more focused approach to its renewable energy investments.

The broader context: challenges in the renewable energy sector

BP's decision to divest its US onshore wind business comes amid broader challenges facing the renewable energy sector, particularly in the United States. Several offshore wind companies have recently cancelled or renegotiated power contracts for planned US projects, citing a combination of factors that are making these investments less attractive.

Rising material costs have significantly increased the capital expenditure required for renewable energy projects. This, coupled with high interest rates, has made financing these projects more expensive and potentially less profitable. Additionally, lingering supply chain challenges have led to delays and increased uncertainty in project timelines.

These challenges highlight the complexities involved in transitioning from fossil fuels to renewable energy sources. While the long-term trend towards cleaner energy remains strong, companies like BP must navigate short-term market realities and financial considerations as they make strategic decisions about their energy portfolios.

BP share price slips despite bounce in oil price

What may worry some investors is that despite last week’s around 6% bounce in the oil price due to heightened tensions in the Middle East and as a hurricane caused havoc along the US Gulf coast, the BP share price only rose by half as much.

There is hope, though, for long-term investors in oil and therefore to a certain degree BP, as extreme negative sentiment in the oil price, as is the case at the moment, has historically been followed by a substantial rise in the oil price, perhaps due to the market running out of speculative sellers.

BP share price analyst ratings and technical analysis

According to London Stock Exchange Group (LSEG) Data & Analytics fundamental analysts are rating BP as between a buy and a hold with 7 strong buy, 7 buy, 5 hold, 9 hold and 1 sell. Their median price target is at 557.42 pence (p), roughly 35% above the company’s current share price (as of 18 September 2024).

BP monthly candlestick chart

The BP share price has been in a downtrend since April and is currently showing no signs of a bullish reversal. Instead it is seen slipping towards its April and June 2020 highs and July 2022 low at 376.55p-to-359.20p which may act as a support zone, were the 55-month simple moving average (SMA) at 393.78p to give way.

For a bullish reversal in the BP share price to become possible, a rise and daily chart close above the mid-July low and mid-August high at 443.00p-to-446.60p would need to be seen at the very least. Ideally the next higher resistance area made up of the June low and July high at 463.15p-to-467.95p would need to be exceeded as well. This resistance zone sits around 15% above the current BP share price, though.

BP daily candlestick chart

Looking ahead: BP's future in a changing energy landscape

As BP navigates these challenging market conditions and strategic shifts, investors are closely watching how the company will position itself for the future. The energy giant faces the dual challenge of maintaining profitability in its traditional oil and gas business while also making meaningful progress in its transition to cleaner energy sources.

The decision to divest its US onshore wind business suggests that BP is taking a more selective approach to its renewable energy investments. This could potentially allow the company to focus its resources on areas where it believes it can achieve the most significant growth and returns.

However, BP will need to carefully balance these strategic decisions with the increasing pressure from investors and regulators to accelerate its transition away from fossil fuels. The company's ability to navigate this complex landscape will likely be a key factor in its future share price performance and long-term success.

Investors interested in the energy sector and BP's strategic moves may want to consider opening a share dealing account to gain exposure to these market dynamics. For those looking to practice trading strategies without risk, a demo account can be a valuable tool. As always, it's crucial to conduct thorough research and understand the risks involved in share trading before making any investment decisions.

Remember, while BP's current challenges present risks, they also offer potential opportunities for investors who believe in the company's long-term strategy and ability to adapt to the changing energy landscape. As with any investment, it's important to consider your personal financial goals and risk tolerance when evaluating BP or other energy stocks.