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Escalating conflict in the Middle East has sent oil prices through the roof in recent days. Naturally, the share prices of ‘black gold’ producers have followed suit — BP (LSE:BP.) has risen 4.3% in value in the last week alone, making it one of the FTSE 100‘s best performing shares.
I wouldn’t be shocked to see the Footsie oilie continue its ascent in the days and weeks to come, perhaps longer. It’s not just the prospect of a full-scale Middle Eastern conflict and a disruption in crude supply that could drive further gains. Fresh breakthroughs on trade talks between the US and major trading partners may also help by improving the demand outlook.
Of course, any reversal in these bullish factors could equally unwind recent momentum. But this isn’t the chief reason why I’m keen to avoid BP shares today.
Supply boom to 2030
Oil remains a critical component of the global energy mix, and will continue to be for decades. Yet the prospect of sustained oversupply as global production increases, and green and nuclear energy grabs share, is why I’m happy to steer clear.
On Tuesday (17 June), the International Energy Agency (IEA) released forecasts that reinforce my concerns. It said that “increased output from the United States, Canada, Brazil, Guyana and Argentina is set to be more than sufficient to cover the growth in global demand in the coming years“. And that’s not accounting for reduced production curbs from the OPEC+ group of nations.
The IEA expects worldwide oil production capacity to rise by more than 5m barrels per day between now and 2030. By comparison, global demand growth is put way back at 2.5m barrels.
Other concerns
This is a threat to the entire oil sector, though BP is especially vulnerable in such a scenario. The business is stepping up oil and gas investment while simultaneously slashing green energy expenditure.
It will now spend between $1.5bn and $2bn on renewables per year under new plans announced in February. That’s down from its previous target of $5bn.
I’m also especially concerned for BP given how rapidly debt continues to climb. Net debt soared £27bn at the end of March from £23bn at the turn of the year.
The business is hoping to get net debt down to $14bn to $18bn by 2027. But it’s reliant on a strong oil price and divestment of non-core assets to hit this target. On both counts I’m not convinced, and this could have significant implications for future share buybacks and dividends.
Too risky
Having said all this, I’m not surprised that BP have investors who are willing to snap up its shares. Prolonged conflict in the Middle East could serve as a major catalyst for oil prices and consequently company profits.
With a 6% dividend yield for this year, BP shares is also one of the largest potential payers on the FTSE 100. What’s more, this reading rises to 6.3% and 6.6% for 2026 and 2027, respectively.
But for me, investing in the oil giant carries far too much risk for my liking. So I’d rather find other UK blue-chip shares to buy right now.
