Stakeholders in fossil fuel goliath Royal Dutch Shell (LSE: RDSB) could be forgiven for breaking out the bubbly following the company’s recent share price detonation.
Shell saw its value gallop 28% higher during the third quarter, and the firm’s meteoric ascent may not be finished yet — indeed, the stock is within striking distance of July’s quarterly peak of £21.48 per share, the loftiest level since May 2015.
But while many momentum investors may be tempted to plough in, I reckon now could provide a terrific opportunity for investors to cash out.
Shocking supplies
Shell’s stock value has received an extra push in recent days after OPEC members had agreed to put a cap on production at between 32.5m and 33m barrels per day. This is down from current record levels around 33.24m barrels per day.
And the cartel hopes to rope Russia into also cutting supply, at least according to the Wall Street Journal. The paper quotes sources close to discussions, who say that secretary general Mohammed Senusi Barkindo hopes to meet Russian energy minister Alexander Novak for “consultations.”
But quite how the group will get its own house in order — and officially agree to supply reductions in November — remains a colossal challenge in itself. Saudi Arabia has already been told by fellow power player Iran that it will ratchet up output to a minimum of 4m barrels per day, and in the longer term still hopes to pull 5.7m barrels worth of oil out of the ground by 2020. And Nigeria, Libya and Iraq are also seeking to boost production.
At the same time Russia keeps on raising its own output, while US oilfield operators are learning to cope in the sub-$50 per barrel environment and are plugging their rigs back into the ground with great gusto.
As a consequence global stockpiles remain stubbornly high, which isn’t good news for Shell. Despite recent drawdowns, stockpiles clocked in at seasonally-bloated levels of 499.7m barrels as of 30 September, the US Energy Information Administration (EIA) reported this week.
Brace yourselves!
And those expecting a significant pick-up in crude off-take to suck up this excess supply look set to be disappointed. Latest EIA demand data showed total US consumption in July come in at 19.712m barrels per day in July, down from 20.126m barrels during the same month last year.
Against this backcloth, I reckon Royal Dutch Shell will struggle to get back into the black any time soon. The black gold digger saw profits on a current cost of supplies (or CCS) basis slide 65% during January-June, to $2.6bn. And the firm’s next set of results scheduled for 1 November is quite likely to prove another horror show.
This could prove the catalyst for a catastrophic share price dive, in my opinion, particularly as Shell currently deals on a huge forward P/E ratio of 29.6 times. I believe that the risks facing the driller far outweigh the potential rewards, certainly at current share prices.