The single reason why you should buy Big Oil now

Despite its recent troubles, BP - along with its equally benighted rival, Shell - still looks like a 'screaming buy'. John Stepek reveals why.

BPs fallen star, Lord Browne, had a tough day at the company's AGM yesterday, with more than one in five of the companys shareholders objecting to his leaving package, after a truly rotten couple of years politically speaking, at least - for the group.

Chairman Peter Sutherland said the past year in particular, was "a perfect storm, but mostly of our own making."

But for all its troubles, the truth is that none of this really matters for BP's share price in the longer term. The thing that really matters is the oil price. And when you look at it like that, BP's shares - and those of its equally benighted rival Shell - look extremely good value.

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Or as some might put it, "a screaming buy".

Here's why

We could be facing "an oil crunch this summer", writes Ambrose Evans-Pritchard in The Telegraph this morning. Opec supplies are at their lowest levels in two years, while US petrol (gasoline) stocks are at their lowest in five years, after a late bout of wintry weather hit in February.

The price of a barrel of Brent is sitting at near $70 a barrel this morning, so we'd hate to see what happens in a real oil crunch' but anyway...

Opec had been cutting supplies to support prices over the winter, but now it looks like they've gone too far. The OECD countries have seen their oil stocks continue to fall in March, "a time of year when countries normally replenish reserves."

Then, of course, there's the ongoing threat of terrorist disruption in various countries across Africa and the Middle East, most of which are also - unfortunately - among the places where we get most of our oil from.

There's the stand-off in Iran over nuclear power, which constantly threatens to turn nasty. Then there's this week's bombings in Algeria, a large oil exporter and the "second biggest supplier of gas to the European market".

And all the while, as these potential supply disruptions keep the markets on their toes, demand is growing all across the globe for more black gold. The International Energy Agency expects China's oil demand to rise by another 6.8% this year. That would see China account for nearly 10% of global oil demand (around 86m barrels per day) - and that figure just looks set to keep growing.

The Chinese know it - and that's why more and more they're going off-market to find new sources, doing bilateral deals with countries in Africa and South America, for example, to secure oil for the future.

Unfortunately, the more deals that are done off-market, the less freely traded oil available for the rest of us - and that means more pressure on prices. Simon Wilson wrote about this energy mercantilism' in a recent issue of MoneyWeek - to read the piece, click here: Russia, Iran and a dangerous axis of oil.

Tim Price, a regular MoneyWeek contributor and chief investment officer, Global Strategies, at Union Bancaire Privee in London, tells us that BP and Shell "remain absurdly cheap" BP's on a 2007 p/e of just under 11 and yields around 3.5%, while Shell's even cheaper, on a 9.7 p/e and yielding 4%.

But one of his absolute favourite plays on rising oil prices is less widely known and unlike BP and Shell, this particular way into oil doesn't have the thorny problem of constantly having to find new reserves to top up its inventories.

Meanwhile, in last week's MoneyWeek cover story, we had more detail on other oil plays, from Canada's tar sands to property in Kurdistan (!) - subscribers can read the piece online by clicking here: Why oil investors are still smiling.

And if you're not yet a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.

Turning to the stock markets

A late rally yesterday saw London stocks end the day in positive territory despite weakness amongst miners and property stocks. The blue-chip FTSE 100 index closed 3 points higher, at 6,416, although the broader indices were mixed. Brewer SABMiller chalked up the day's biggest gains after reporting strong growth in lager sales. For a full market report, see: London market close.

Across the Channel, the Paris CAC-40 closed 2 points lower, at 5,748, and the Frankfurt DAX-30 lost 9 points to close at 7,142.

On Wall Street, US stocks bounced back from Wednesday's sell-off yesterday. The Dow Jones industrial average ended the day 68 points higher, at 12,552, off an intra-day low of 12,428. The bulk of the day's gains were seen on the Nasdaq index which added 21 points to close at 2,480. The S&P 500, meanwhile, gained 8 points to end the day at 1,447.

In Asia, Japanese stocks ended the week lower today, with the Nikkei closing 176 points lower at 17,363.

The price of crude oil continued to rise this morning, adding 57c to climb to $64.42 a barrel. In London, Brent spot was at $69.42.

Spot gold had climbed to $677.40/oz this morning, whilst silver was at $13.86/oz.

And in London this morning, a report by Incomes Data Services showed the biggest first-quarter rise in the median UK wage settlement for five years. The average wage rose 3.5%, led by staff at UK banks such as Barclays and Royal Bank of Scotland.

And our two recommended articles for today...

How to profit from India's M&A battle

- India's firms need to grow quickly in 2007 - and the easiest way is through acquisitions. Competition is likely to be intense, so buy in now for big profits. For our recommendation of three potential targets, click here to read this former MoneyWeek cover story, just available to non-subscribers: How to profit from India's M&A battle

Will the US subprime crisis cause a UK property meltdown

- As regular MoneyWeek and MoneyMorning readers will know, we remain pessimistic on the outlook for the UK property market. However, Brian Durrant takes a somewhat different view. To find out why he thinks British estate agents needn't lose sleep over America's subprime worries, read: Will the US subprime crisis cause a UK property meltdown?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.