What does the Russia-Ukraine conflict mean for the BP share price?

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BP [BP.L] shares tanked after the decision to sell its near 20% stake in Russian oil giant Rosneft. The London-based company had come under intense criticism to divest its stake, culminating in the announcement on Sunday night.

In the run-up to the exit, BP shares had noticeably lagged behind the other oil majors. Although the escalation of tensions between Russia and Ukraine had pushed up oil prices, it was felt that BP's Rosneft stake would be affected by any sanctions imposed on Russia's oil and gas sector.

Rosneft exit and BP's share price

BP's share price was down over 7% by Monday lunchtime as investors digested news of the decsion, with its US-listed shares falling in premarket trading. The Rosneft stake is valued at $14bn and the decision will cost BP $25bn, according to its own figures. Exiting also cuts off a valuable income stream for the oil major. According to Susannah Streeter at Hargreaves Lansdown, BP's underlying profit from Rosneft was $2.8bn last year, up from a previous $56m. 

BP said in a statement that it "remains confident in the flexibility and resilience" of its finances, and reaffirmed its guidance for shareholder distributions, including dividends and buybacks, through to 2025. Chief executive Bernard Looney also resigned from Rosneft's board. It still remains unclear how BP will go about practically divesting its position.

Yet for BP, rising oil prices could counteract the loss of business from Rosneft. On 25 February, RBC Capital Markets analyst Biraj Borkhataria upgraded the company to 'outperform', writing in a note to investors: "We believe any hypothetical risk to cash received would be offset by rising geopolitical tensions. To put this into context, we estimate that the $1.8bn in dividends could be offset by a $5-6/bbl change in oil prices on an annual basis."

Beyond BP, other energy firms with a presence in Russia, such as Shell [SHEL] and TotalEnergies [TTE], will likely come under more pressure to sell their stakes.

How has the Russia-Ukraine conflict impacted oil prices?

Oil prices soared after Russia launched its invasion of Ukraine, with Brent crude at one point last week touching $105.79 a barrel. Fears over supply constraints have since eased, with both Brent and WTI futures falling below $100 a barrel by the end of the week on hopes that the two sides in the conflict might sit down for talks.

As oil prices gained, so did the stocks of US oil giant Chevron [CVX], up 8.8% in the past seven days as of 28 February, and Harbour Energy [HBR.L], up 15.6%. In contrast, BP shares fell 6.4%, closing Monday at 363.55p as its stake in Rosneft caused investors to sell.

Even before the conflict, oil prices were driving higher as demand outstripped supply following the post-pandemic recovery. Brent crude prices climbed from $68.87 a barrel on 1 December to $99.08 a barrel on 24 February. Both Brent and WTI are now trading at their highest point since 2014 and Opec has sought to increase crude oil production.

As reported by the Financial Times, Goldman Sachs has forecast that crude prices could hit $125 a barrel, even without sanctions. Rystad Energy predicts that crude could reach $130 a barrel or more should sanctions be put in place.

In any case, it's unclear whether western nations would impose sanctions on oil exports from Russia. The country is the world's third-largest exporter of crude oil and the biggest natural gas exporter. Together, the two represent more than half of Russia's total exports. Any sanctions on its oil and gas exports would hurt the country, but also lead to price increases in other nations. In the US, the price of petrol has already gone up sharply due to inflation.

Where next for oil stocks?

Energy stocks tend to do well in inflationary environments -- the big fear in the markets before the conflict in the Ukraine broke out. The increase seen in the share prices of BP and Chevron is in contrast to the drop that growth stocks have faced this year.

Institutional investors have also been investing in the sector. In the fourth quarter, famed hedge fund manager Stanley Druckenmiller's biggest purchase was Chevron, picking up 824,440 shares. BP's biggest institutional backers include Vanguard [VOO] and BlackRock [BLK], with both owning substantial positions in the company.

In the short to mid-term, oil prices are likely to continue to have a significant bearing on the performance of the likes of BP and Chevron. Earlier in February, BP revealed bumper profits of $12.8bn, representing an eight-year high. Just how much the loss of Rosneft will affect business will be keenly watched.

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